Why a pricing model?
A pricing model (or energy cost model) is an essential tool for energy cost managers navigating markets today. With a pricing model, 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 the top 3 reasons a pricing model is essential to business planning.
What is a pricing model?
In fact, customers ask us this question all the time. 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 an energy pricing model as analogous to a weather forecast. Instead of giving you insight into the weather, it forecasts what you will be paying for power, gas, delivery and supply over the next 12, 24 or 36 months.
As with a weather forecast, a lot of data get crunched in producing the output from an energy pricing model. It’s important to have access to the best data available to experts. The MWh’s pricing model crunches the same data that energy traders, wholesalers and suppliers use. Pricing models help these players price risk and manage their exposure to commodity markets. We take your historical volumes (kWh or therms) and then transform usage and cost components into a forecast of what you will pay over the next 12, 24, 36 months (and all the months in between, for that matter).
Don’t I already have access to this information?
“Yes, well, what’s so great about that?” some customers ask. The model 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 this 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 for the simple and obvious reason that they don’t want you to know too much about how they price their contracts. Also, they don’t want their competitors to know how they price their products. Consultants and brokers may be able to access wholesale prices, or quoted prices from suppliers provided on a given day. They may rely on relationships they’ve built over time with certain suppliers. Consultants and brokers don’t have a pricing model.
In order to really be useful to you, the energy manager, a pricing model needs to offer the following features: it has to be account-specific, updated every day, and it needs to provide a forward view into future prices. This forward view is critical, by the way. It’s not simply an educated guess about future prices. The forecast is a durable feature of pretty much all active financial markets.
The forward prices we’re talking about are the ones that arise from all the activity of the participants in the relevant energy market as they enter into longer-term transactions. This information is not something that you can get from a Bloomberg screen or the internet (well, if you were working in the interest rate markets, it would be available on Bloomberg, but this kind of transparency isn’t really available in the energy markets). Our pricing model gives you valuable price transparency into a market that is otherwise opaque to you, the end user.
So, you ask, what are the 3 top reasons I need a pricing model?
What is it that makes a pricing model so essential?
Reason 1: Knowledge is power.
Would you buy a new car without understanding the difference between the sticker price and the manufacturer’s suggested retail price? How about a used car without access to the blue book value? Have you shopped for an airplane ticket lately without getting all the information you could about your different options from different airlines, different routes, different flight times and layovers?
Without a pricing model you can’t independently evaluate power and gas alternatives, product options, quality and value. Instead, you have to rely on other players in the market to provide you with this information. You have to trust that their interests align with yours. And also you have to pay them. With access to your own pricing model you’ll have the same kind of insights into power and gas that you have come to expect in most of the transactions you do in your daily life. With an energy pricing model, you have the ability to negotiate in a way that you did not before.
Reason 2: Transparency saves time and money.
In addition, the energy industry is well known for being opaque and difficult to navigate. That is partly due to the lack of readily-available information and insight. In addition, many players in the energy supply chain worry about what happens when customers have access to transparent pricing and costs. If you have your own pricing model, the heavy lifting of figuring out what you should be paying and how it compares to your alternatives is clear and easy to understand. Having your own pricing model will save you time and money on a number of essential tasks: purchasing, budgeting, forecasting and bench marking.
Reason 3: You’re always a buyer, so why not level the playing field?
As a customer in a deregulated market (or any market, for that matter), you are always a buyer in the market place. You are always “short” power or gas. That fact should put you in a position of power, because suppliers should always be vying for your business. You are not able to wield that power, however, if you have no insight into what power and gas should cost next month, 6 months from now or a year from now.
The graphic above shows how MWh’s pricing model allows clients to view their costs over any time frame. You can see how supply costs have changed over time. That way, you can evaluate for yourself whether now is the time to engage in a new contract.
Bottom line for energy and finance decision makers. Quality information delivered in a timely way is essential to today’s energy cost/ finance manager. This information allows 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.