energy budgeting and procurement: securing stable energy prices in

Energy Budgeting and Procurement: Securing Stable Energy Prices in Today’s Volatile Markets

“Advisory Service for Energy and Climate Change”

John LambertSenior Business Development ManagerDirect Energy Consulting

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Securing Stable Energy Prices in Today’s Volatile Markets

This presentation will provide guidance on energy procurement that will help you:– Take control.– Capture the benefits and successfully manage

risk.– Understand different market products to

minimize the exposure to price volatility.– Link the different elements of your energy

portfolio including Climate Change Action –Green Energy procurement.

Energy ↔ Climate Change Action ↔ Green Energy

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Capture The Maximum Benefits and Successfully Manage Risk

While Public Sector consumers may have their own governance issues and practices around procurement, it is important to understand energy markets’ governance and sales practices.

Energy commodities trade hourly in markets such as New York Mercantile Exchange (NYMEX- oil & gas) and Hourly Ontario Electricity Price (H.O.E.P - electricity), which means the price is volatile by nature.

As Public Sector consumers buys from Retailers and generally cannot procure from Gas Producers or Electricity Generators it pays to understand the energy market’s business practices and be aware of who is who.

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The Basics About LDCs

Natural GasGas is available through your Local Distribution Companies (LDC) on a default basis.If you don’t transact your own gas supply contracts the LDCs will continue to deliver gas to you but on a regulated basis and with price mechanisms that don’t necessarily reflect the market.

Gas is priced based on the LDC’s acquisition cost of gas but may be billed differently.

Gas is shipped from Western Canada to Eastern Canada at the rate of 1/365th of your annual requirement per day through the available pipelines. Options exist for the Customer, a a Retailer or LDC to manage the transportation requirements

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A Glance at the Pipeline

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Natural GasLDC gas prices can be set in advance usually for short periods of time (30 - 90 days) but can be adjusted after the fact based on the LDC’s actual acquisition cost of gas over the same period or longer periods.

Not ideal for the budget conscious

LDCs do not profit on the purchase and resale of gas. However, LDCs acquire gas on a “one size fits all” basis….not on the basis of your risk and budgetary objectives.

Since deregulation in 1985, LDC pricing and market pricing have been out of synch.


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LDC vs. Market PricesHistorical LDC vs. Market Prices

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Natural GasLDCs are in the business of importing gas into the province, taking delivery of gas, storing it, managing its movement in their pipeline infrastructure and delivering it to your gas meter.

Market gas prices are driven by weather, storage inventory, world oil prices and other competing fuels and pipeline interruptions. The art of predicting these things with consistent accuracy is yet to be perfected.

With all these uncertainties, it is important to be able to create a strategy that will address your needs.


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ElectricityElectricity cannot be stored. It is created in real time and must be utilized or wasted.

Electricity prices are time sensitive depending on the time of day, day of the week, week of the month and month of the year, therefore it is critical to understand your usage profile based on these time parameters. (Time-of-Use pricing)

Electricity profiling can be done from historical hourly data analysis and such data is available to you from your LDC.

Electricity

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ElectricityHourly Ontario Electricity Price (H.O.E.P) is determined on the basis of future hourly bids made by the generators into the Independent Electricity System Operator (IESO).

Electricity is delivered through your LDC on a default basis.

If you don’t transact your own electricity supply contracts the LDCs will pass through the regulated average of the each hour’s spot price for the preceding billing period.


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ElectricityLDCs do not offer any price programs for default customers.

It is near impossible to predict what your ‘end of month’ price will be on the LDC default supply option.

Not ideal for the budget conscious

LDCs do not profit on the purchase and resale of power.

Limited market with only a handful of generators including Ontario Power Generation and Bruce Power making up more than 50% of the market.

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When You Use Electricity is Equally Important as How Much You Use

Time of Use measurement of electricity usage is criticalAverage usage measured for pre-defined periods of time

– On-Peak Period:Monday to Friday7 am to 11 pm

– Off-Peak WeekdayMonday to Friday12 am to 6 am

– Off-Peak WeekendSaturday Sunday24 hours

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Gaining Control Requires Analysis

External resources (Consultants) provide their customers access valuable tools that:

Create load profilesCreate Time Block strategies (electricity)Create Seasonal strategies (natural gas)Develop risk profilesCalculate forward net effective costsCompare purchase performance vs. market prices

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Twelve Month – Hourly Consumption Profiles

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Daily Profiles

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Weekly Profiles

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Blocking Strategy

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Analysis Tools

Purchase performance vs. Market and System pricing

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ElectricityPre-deregulation electricity prices were subsidized for far too long and were too low, hence were a major contributing factor to the Ontario Hydro debt.

In May 2002 market prices began at substantially higher rates than pre-deregulation prices but proved to be a bargain.

Multi-year contracts could be secured for 4.5 ¢/kwh for a 7 x 24 Physical Block and 5.9 ¢/kwh for Load Following.

Today’s prices are ~ 6.0 ¢ for 7 x 24 and ~7.0¢ for Load Following.

The Basics About Electricity Pricing

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ElectricityPower prices are driven by weather (temperature), rainfall, wind, world coal prices, nuclear generation capacity, natural gas prices and other competing fuels and transmission interruptions (remember the Blackout?)

The art of predicting these things with consistent accuracy has yet to be perfected.

Again, it is important to be able to create a strategy that will address your needs and consider these price affecting factors.

The Basics About Electricity Pricing

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Government Intervention

ElectricityAssistance programs are in place on a market transitional basis.

Rate Protection Program (RPP)– For small accounts of less than 250,000 kwh per year

(~$17,500/yr).– Fixed discounted prices are in place on LDC default option (if the

account is not under a retail contract).– Some RPP accounts may be better off on a Retail Contract.

Analysis needs to be done.– RPP is only a known certainty until March 2008.

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Government Initiatives

Provincial Benefitwww.theimo.com/imoweb/siteshared/electricity_bill.asp

Market Power Mitigation Rebate

www.opg.com/indexserver/asp_indexserver.asp

Clean Energy Standard Offer/Conservation Programs/Demand Response Programs

www.powerauthority.on.ca

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Advanced Metering Initiative

Ontario Power Authority has mandated a coalition of large LDCs to install 800,000 interval meters in Ontario covering all accounts below 438,000kWh by December 2007 Coalition members include: Toronto Hydro, Enersource, Veridian, Horizon, Powerstream, Hydro Ottawa, Chatham-Kent, London Hydro, Milton Hydro and Newmarket Hydro.Cost to be blended into distribution rate base effective immediately – no upfront cash outlay. Alberta and B.C. are going this way as well.So in the near future, you will need to consider several types of electricity pricing products.

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Coalition of large LDCs are to install the balance of 3.5 million interval meters in Ontario covering all accounts above 438,000 kwh by December 2010

In 2005 George W. bush passed an “EPAC” bill that mandated all LDCs in U.S.A. to file a plan for interval meter installations and ‘Time of Use’ rate offerings by end of 2008

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Once interval meters are installed, a Time of Use rate will be implemented by your LDC. An imposed different rate for ‘On Peak’and ‘Off Peak’ power use. This could be good or bad depending on your load profile. An alternative is a strategic Physical Block Strategy purchase through a Retailer.Interval meters allow you to proactively adjust your consumptionhourly based on price upset. Ontario Power Authority (OPA) offers a Demand Response Program that rewards actionable electricity conservation during peak price hours.Interval metered accounts enable you to price the energy you use, when you use it.

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Time to Go Green

Theoretically, if everyone purchased only 12% of their power needs from green energy sources, we could cut the coal-fired generation in Ontario by half.

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Green Energy

Climate Change Action legislation is not far away.

Taxes on excessive use of energy will be the norm (recent Jim Flaherty Federal Budget)

Monetization of emissions or ‘green’ credits will motivate the use of green power and energy conservation investment.

Today green power fixed prices range from 6¢ - 11 ¢/kwh

Many Retailers are now offering green power.

Green Power Pricing Consumer’s Guidehttp://www.pollutionprobe.org/whatwedo/greenpower/consumerguide/ontario.htm

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Gaining Control

Energy procurement requires:- Regulatory knowledge, - Awareness of LDC Demand Reduction Programs, - Awareness of OPA Demand Response Programs,- Finance & Legal resources- Several market participant relationships.

Internal procurement resources need to gain expertise from external resources.

Acquiring energy expertise from energy suppliers and consultantsis easy. The choice of which should depend on the amount of fiscal risk you bear in your annual energy purchases.

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Gain Control of Budget, Processes and Ts & Cs

Budget certainty is critical in most businesses to enjoy financial success or at least break even. The Public Sector is no different.

Need to control:- your annual renewal dates, - the type of energy products you desire, - transaction processes, - pipeline space options, storage options and billing options- Consumption vs. contract quantity commitments

With the proper resources (internal or external) you’ll have the best chance of meeting your objectives.

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Control with Price Certainty

Chasing energy market spot prices is a tiresome activity and canlead to disappointment. Suppliers know this is a fool’s game.

Buying energy is not about gambling with fully open positions (spot pricing only) and waiting to find the lowest price.

Buying energy needs to be about setting a budgetary target and developing a strategy around achieving that target.

Once the target is set and objectives are in place a strategy may include some open positions that are intended to benefit from a falling market.

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Energy Procurement Plan Basics

Create a plan based on – Developing a budget target price – Developing a risk profile – Diversifying between open and fixed pricing (if necessary)

Select and negotiate Enabling Agreements with at least three suppliers who meet your criteria

Monitor daily until all the energy in the portfolio can be locked in at or below your budget target price….Stick to the Plan.

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RFP Process for Best Results

Issuing a Request for Proposal for Pricing is a dicey game as energy prices are sporadic and therefore it is difficult to determine who is the most competitive supplier at any given time

Generally, Retailers who have history in supplying the Public Sector will be very competitive with each other.

It is important to know who to deal with on the basis of– credit worthiness, – track record, – flexibility of contract – ancillary products and services that may be of interest

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Enablement is Key

Public Sector consumers should consider enabling up to three Retailers for either gas or electricity and execute their Enabling Agreements

As Retailer acquisition costs change by the hour, Retailers will only offer firm prices on a limited time basis i.e.) an hour or a day

Load profiles and historical detail on all the Customer’s electric accounts will need to be submitted in the RFP for Price offers

The enabled Retailers need to be advised on what portion of the energy portfolio will be awarded to them subject to final price approval.

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Apples to Apples

Price offers should be submitted electronically within the same hour to be fairly considered for competitiveness.

Customers need to make their price acceptance decisions and signoff before the “good until” time expires.

The price can be repeatedly reset and ultimately finalized by having the enabled Retailers issue a binding refreshed Price Confirmation document on a daily basis

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Effort and Risk

The degree to which one strategizes would reflect the amount of perceived risk….i.e.), A $40,000 consumer will not or cannot invest great time and expense in energy procurement whereas a $10 million energy consumer will certainly spend more time and invest in external resources to get it right.

Where are you on this scale?

$10 million$40K Energy Expenditure

Low RiskHigh Risk

Limited Resources

Need For Consultant

Risk Requires More Resources

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Understand Your Energy Value Chain

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It’s Thinking About Old Challenges In New Ways…Applying Tomorrow’s Thinking Today

Thank you!

energy budgeting and procurement: securing stable energy prices in

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