Energy Market Insight Q&A with Energy Consultant, Thomas Best
Q: It’s been a challenging 18 months in the energy industry, which has posed setbacks for our clients in a number of ways, the most notable being price volatility. What have you seen transpire with your clients and do you see things shifting now that we are experiencing some relief in prices for electricity and natural gas?
A concept that has certainly always existed but has become more prevalent as volatility reaches all-time highs is the idea of timing the market. When markets are moving up, we see client hesitation due to the fact that there is hesitancy around the risk of locking in at the peak. Conversely, when markets are moving down, we still see hesitation as clients hold out hope that they will sign at the bottom of the market. As anyone in the industry will tell you – and we say this all the time – no one has the crystal ball on where energy prices will go. The only way to know with certainty that we’ve reached the bottom is when the market starts trending up again. At APPI, we advise our clients not to worry about timing the market perfectly, but rather selecting a procurement strategy and price that aligns with their budgetary goals.
If the pricing is outside of a client’s budget, it’s not unusual for our team to advise clients to wait, monitoring the market on their behalf. We are operating first and foremost for our client, so their best interest are our best interests. We can also explore a variety of pricing products beyond the traditional fixed all-in. But the key in all of this is starting the process early. The more proactive you are with your renewal, the more time we have to monitor the market & explore various products. Don’t wait just because you think pricing is high now. Let us get to work on your behalf as soon as possible.
Q: Beyond a fully-fixed procurement contracts, explain why other options, such as block and index for example, might be a more viable option for some clients.
Many of our clients that have been on fixed all-in products for years are now looking to other options, based on their level of risk tolerance or individual goals or needs. In Ameren IL, for example, we are seeing record-high capacity costs, so rather than lock capacity in for four or five years when it is at such a high point, why not pass it through and pay it at market cost? There is no avoiding the high cost of capacity this calendar year, but the hope is that in years 2, 3, 4, etc. of your agreement those capacity costs will decrease as more generation is attracted to the region, allowing organizations to reap the benefit of that decreased cost. Capacity pass-through is also more favorable for customers participating in efficiency projects/programs and want to see the immediate benefits of their reduced demand.
Block and index, as you mentioned, is becoming more popular for some of our larger users who are coming out of agreements signed in 2018-2020 when markets bottomed out. Rather than fix a price for 100% of their load on one day when the rate is higher than what they currently are paying, instead we employ a block & index strategy to take some of the risk off the table (hedging say 25% of the total load) and then monitor the market over a period of time for other favorable hedges to strike.
While fixed all-in is still a very viable strategy for a large portion of our customers, for others the days of “fix it and forget it” are gone.
Q: You work with a large portfolio of schools and non-profits – what are some of the energy challenges for that type of client?
Many schools and non-profits have made commitments to become more “green” or sustainable, with many receiving additional pressure from their boards to move in that direction. As a school/non-profit, it can be difficult to know where to even start. Luckily, we at APPI can help our clients achieve the green goals they have set, or even help them to set those goals.
It typically starts by looking back at their historical data because you can’t know where you’re going until we’ve collectively established where you’ve been. Once we’ve completed that analysis there are a variety of ways to go about hitting those sustainability goals and reducing your carbon footprint, and our team is here to facilitate that process. Solar is a great opportunity for schools, but it’s not the only one. For those who do not have the land, roof space, or can’t make the capital investment, there are options to participate in solar/wind/geothermal projects that don’t involve any changes to the property/physical building. Two increasingly popular options with the ability to get an organization to 100% green are: participating in community solar projects and purchasing Renewable Energy Certificates (RECs).
Additionally, a great way to reduce your carbon footprint is by using less power and becoming more efficient. We can help find “low-hanging fruit” opportunities with very short payback times via LED lighting retrofits and boiler/chiller/HVAC replacement. Oftentimes, these projects will include financial help from the utility/state or can be completely funded on the electricity bill with little-to-no out-of-pocket payments.
Q: Same question, but for the banking industry, where you also have a strong base of clients.
For our larger bank clients, I’ll go back to the block and index product. This product makes a lot of sense for these large users as it’s a similar idea to dollar cost averaging. Do you want to buy 100% of your power for a four-year term on one day? If the price is right, maybe you do. But if you’re not completely sure, then let’s employ block and index that will allow us to purchase portions of the load throughout the year and lessen the impact of market volatility.
Carbon accounting is also a growing need [which I will discuss more below].
Q: Outside of the procurement of electricity and natural gas, what are some of the energy solutions that have moved to the forefront for your clients and prospects?
In the school/non-profit space we’re seeing a resurgence in organizations looking at solar opportunities. Just about everyone wants to be greener, but maybe they looked at solar a year or two ago and the numbers didn’t pencil. Now, as a result of the solar bill from August 2022 we are seeing increased opportunities for non-profits where solar does make substantially more sense than before. We can conduct our entire solar analysis for any organization at no obligation and no upfront cost.
For banking clients, there is an increased focus on carbon accounting/tracking through our utility data management software. Every bank knows this is something to keep track of, but a lot were unsure about how to actually do it. This all-in-one portal is a game changer for many – and most users see a reduction in overall energy usage/spend just by having a system to accurately monitor their energy.
Q: In your opinion, what makes APPI Energy unique in our approach to energy management?
Our holistic approach to energy. We’re not just a broker shop, or solar consultant, or lighting expert. We’re all of those wrapped into one. I think that is a huge benefit to our clients because rather than reaching out to three to four people for their various energy needs, they can have one point of contact that will handle everything on their behalf and allow them to get back to doing their job or running their business/organization.
Q: How do you see the industry evolving over the next few years? And what advice would you give to clients to navigate that landscape?
Whether you are in favor of it or not, we will continue to see a push towards renewable/green energy and there is a cost associated with that. This will grow on both a state and federal level. It will be interesting to see how we balance our grid with the extremely reliable sources of power like nuclear and natural gas with other sources like wind and solar, especially in terms of capacity (the cost to keep the grid reliable).
The energy world is also becoming more global. It is no longer just about what is going on in the United States that will impact your pricing. As we continue to be a world leader in natural gas exports, we will continue to see factors like the war in Ukraine and weather in Europe/Asia have a financial impact on our own energy costs. My advice to clients and anyone else is to lean on your energy consultant for advice and recommendations. Energy is typically a top 3 operating expense of any organization, but it can be easily forgotten. Take time to connect with your energy consultant and develop an actionable plan to help your organization navigate through these volatile and challenging times.
Thomas Best, CEP, EMP
Energy Consultant
