Access to your own energy cost model makes a huge difference to businesses today. With this information, you can more accurately plan and manage your budgets and costs. Without it, you’re flying blind. You need access to a forecast of supply and delivery costs to plan and manage your business. Don’t settle for less. In this post, we explore why it is so important for businesses to gain specific cost insight in order to run your business.
What is an energy cost model ?
Customers ask us this question all the time. And we’re so deep into the business of energy that sometimes we don’t take enough time to explain it. Here’s the quickest summary we can give: Think of a cost model as analogous to a weather forecast, but of what you will be paying for power, gas, delivery and supply over the next 12, 24 or 36 months—using the best data available to experts.
Don’t I already have access to this information?
Sometimes customers say “yes, well, what’s so great about that?” The model that we provide to you in our software is the same one that energy retailers use in pricing their products to you, the end user. We know because we’ve been in that business. We’ve built pricing models for retail suppliers, large and small, over the years.
Most customers are not aware of the fact that you’ve never had access to your own, account-specific pricing model before. Suppliers don’t provide it to you. Consultants and brokers may be able to access wholesale prices, or quoted prices from suppliers provided on a given day. Consultants and brokers don’t have the expertise to build a costing model.
The one that you need is account-specific, available to any customer, updated every day, and offers a forward view. This information is not something that you can get from a Bloomberg screen or the Internet. It’s valuable price transparency into a market that is otherwise opaque to you, the end user.
How do you forecast energy usage and cost?
The first step in this process is to build a view of your expected usage for the next 12, 24 or 36 months. Last Winter and the Winter before were warmer than most Winters. If you use last year’s usage as a proxy for this year, you would under-forecast power and gas usage. We employ a usage forecasting process using your historical load shape and typical meteorological year temperatures (TMY) to normalize historical usage.
For delivery costs, you need access to your local utility’s tariff in order to know more or less what you will pay.
Supply costs are calculated using inputs from wholesale markets (for commodity power and gas). The model also forecasts transmission costs, and, in the case of power, we add capacity costs, ancillary services costs, risk premiums. We run an algorithm that calculates cost scenarios for different products using usage and cost forecasts described above. Our market-tested pricing algorithm calculates the final cost. Once we’ve run that analysis, you get a look at what you can expect to pay for power and gas.
An earlier article, available here, describes the components of an electricity price. In many ways, gas is both simpler and more transparent and is comprised of the commodity, natural gas, and the costs required to transport the gas to your facility.
Ok, so how do you make use of this technology and know-how that the MWh provides in order to gain insight into your future energy costs?
Why is an energy cost model important?
If you’re planning to buy paper clips or reams of paper, you can peg costs to prior year’s costs (plus inflation). You cannot take that approach with energy. Why? Because power and gas prices can, and usually do, vary markedly year over year. Certainly, next year will never look exactly like last year.
Energy is a commodity that is actively traded in the futures markets. The price varies constantly. What you pay next year will not be what you paid last year. And yet, many customers have no way of readily forecasting costs or usage. So, the simplistic approach when you budget and forecast cost, is to take the last 12 months of cost and usage and add some inflation adjuster with the hope that next year will not deviate significantly from last year, in the same way that you might budget for other supplies. In fact, the good news is that since energy is a commodity, there is a futures market for it. Actual future gas and electric commodity prices are available.
It has always been difficult to access quality, updated energy information….Utilities and suppliers are not good at providing access to data, nor are they highly motivated to do so. And yet, it is impossible to run a business today without quality energy information delivered in a timely way.
So what can you do about budget uncertainty?
Fix your variable costs. Some customers solve this problem by fixing their delivered unit rate every year. They do so when they purchase a fixed price contract. This strategy goes a long way to ensuring budget certainty, but it means that customers pay premiums to suppliers.
Get access to your own pricing model. MWh software automates data acquisition, transforms data into actionable information using a proprietary pricing model. There may be other software services that also provide this capability. Do your research and find out what your options are.
Having access to this type of commodity pricing tool supports you, the financial and energy decision maker, by enabling accurate forecasting and by providing valuable pricing insight during the buying process. The MWh program has a track record of delivering significant returns based on providing actionable information.
Bottom line for energy and finance decision makers. Quality information delivered in a timely way allows energy and finance decision makers to save money, validate decision making and focus on strategic investments and decisions. You have more, and better, resources available to you now than ever before. Make sure you’re using all of the tools you can to improve your business outcomes.