Today's energy consultants are more like energy therapists.
You fear that such a large increase will blow your budget. You feel helpless. The perspiration is beading above your brow. You think there's nowhere to run, nowhere to hide from rising electricity rates.
But before you take drastic steps to compensate for the waxing your utility supplier has just given you and lock into any contracts, consult an energy management firm. An energy consultant's role is to talk with clients and listen as they explain their goals and budgets, and then decide what will work best for them and make their job easier long term. However these days, energy consultants can substitute for an energy therapist.
For example, when I ask clients if they want budget certainty or to obtain the lowest price against opportunities available in the market, they will say yes, they want both. But, since it's not possible to have your cake and eat it too, an energy consultant must read between the lines and evaluate how much volatility the client is willing to take, and more importantly, how much volatility the client is able to take. By listening closely an experienced energy consultant can offer the proper advice and retain their clients' sanity.
Recently, one of Cadence Network's national multi-site clients with a number of locations in California was facing an increased renewal rate of 9.3 cents per kilowatt-hour, after paying 7 cents per kilowatt-hour under its previous contract.
The company needed answers on how it could get its energy needs closer to 7 cents per kilowatt-hour. Should they bite the bullet and lock in at a higher rate or were there other opportunities out there? As it turned out, the market was finally stabilizing after post-Hurricane Katrina's highs, and the best value was found in the short-term market.
The company locked in a portion of their power requirements, and leveraged the short-term market for the remainder at an average of 6.6 cents per kilowatt-hour--a lower rate than the previous year.
Cadence understood that the client's No. 1 objective was to get as close to 7 cents per kilowatt-hour as possible. Cadence also knew that the client was willing and able to take some risk. So by leveraging its network of suppliers, monitoring the market daily, and seizing opportunity when it presented itself, Cadence achieved this lower rate.
Buyers should understand that market risk is not a bad thing; it is the likelihood of the unknown. The market can fluctuate up or down at any time, presenting challenges or opportunities. It's a risk because even though consultants may be able to venture a pretty accurate prediction, no one knows for sure which way the market will go.
Let's take a look at what the market is doing right now. The market has fallen off 50 percent since hurricanes Katrina and Rita, and is currently fluctuating within a relatively narrow range driven by short-term weather forecasts.
Property managers should keep an eye on this upcoming winter season: The colder the winter, the more demand there will be for energy, which may drive up prices. A milder winter, might create opportunities in the marketplace.
Because businesses and consumers cannot afford to be without electricity, energy prices can be unreasonably driven by fear and hype, from hurricanes cutting supply lines, to world leaders cutting oil production. These events can undoubtedly drive up prices, and leave businesses scrambling to curb their energy expenses.
I recommend all property managers become more market-savvy, and pay special attention to natural gas pricing. Why natural gas? Because natural gas prices are the leading indicators for electric prices--and as the price of gas moves, so do electricity rates. So far this year, the storage of natural gas is at an all time high. This could be a good indicator of how market prices fluctuate this year.
A good resource for natural gas pricing is the NYMEX Web site www.nymex.com. Property managers should make a habit of checking NYMEX at least once a week.
In short, yes, property managers can do their part to understand the energy markets better. But they can also rest assured that their energy consultant is only a phone call away, ready to listen and decipher what you are really asking for. It's all about balancing the goals and objectives of the organization, whether it's attaining budget certainty, or getting the lowest price against opportunities available on the market.
BY JOE FALCI, DIRECTOR OF RATE ANALYSIS AND ENERGY PROCUREMENT, CADENCE NETWORK INC.
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|Publication:||Real Estate Weekly|
|Date:||Dec 13, 2006|
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