Lessons from the field: What happens when you don't manage energy costs?

Lessons from the field: What happens when you don’t manage energy costs?

This post is another in our lessons from the field series in which we relay experiences from large energy users.

How purchasing worked before…

A large, multi-million dollar energy buyer in New York managed power and gas purchasing and budget using a sophisticated purchasing strategy. While it wasn’t easy, he was able to access data in an ad hoc way to determine the right time to purchase power and gas. He worked with a supplier to layer in purchases at opportune times. He knew he would never get it just right, but he was relatively certain that he wasn’t overpaying and, at the same time, he was managing risk appropriately.

We spoke with this buyer. He liked MWh software and was planning to use our software to:

enhance his purchasing process
get greater transparency into markets
validate his strategy
automate utility bill management.

Then, there was a change in personnel. He stopped making the decisions for purchasing and another team was brought in.

Fixed vs Index vs Default — Clients can leave a lot of value on the table when they over-insure. It is important to balance budget certainty and appropriate levels of risk.

How purchasing works now

The new team decided to change strategy. They decided to buy a fixed price every one to two years in order to gain budget certainty. When the contract came up, periodically, the new buying team conducted a reverse auction. In the intervening years, no one paid attention to power or gas purchasing.

During the course of that period, markets dropped, increased, moved around, but mostly dropped.

How does it feel now?

We spoke with our original contact just today. He said he “cringes” every time he thinks about the money his organization has left on the table.

“Whenever we beat our budget before, we always received a percentage of that savings for energy projects. That’s gone now. I thought about trying to calculate the money we’ve left on the table. But it wouldn’t be good for my career. My only regret is not buying your software when we had the chance.”

Bottom line for energy buyers and managers: There is such a thing as over-insuring. While it may be easier to just buy a fixed rate and put it away for years, it is simply not the best approach for any large organization.

Now that there are information resources available that allow buyers to engage in markets in a clear and transparent way, why not use them? Furthermore, the complexity of the energy industry and energy markets of the future will demand a more engaged and active approach.