The High Cost of Going It Alone
Would your company pursue a project that yields a 400% Internal Rate of Return, a net present value exceeding $500,000 and provides immediate payback? If so, keep reading.
Sourcing your energy with a 3rd party supplier is a great way to improve your company's bottom line and mitigate risk. Too often, however, people try to tackle a sourcing project themselves, underestimate the effort required to get bids, and do not obtain the best possible rates. Working directly with a supplier will limit your options and result with them receiving greater margins and more favorable terms. Retaining a professional consultant will help you create a competitive environment, compress those supplier margins and skew the terms and conditions in your favor, all with no out-of-pocket cost or obligation to accept any brokered offer.
Have you ever met (or done this yourself) someone who said, "I don't need a realtor, I can sell my home myself and save lots of money?" Only to see a realtor sign pop up in his/her lawn six months later after much wasted time and effort. Or the jack-of-all-trades who doesn't think he needs to hire out a home remodeling project. Then the project takes 3 times as long as it should and the craftsmanship isn't up to par. If you or your company share this do-it-yourself mentality, the following analysis might be an eye-opener and a reason to rethink that strategy.
A good energy consultant will be able to help you in many ways but we will focus on how he/she can help with energy supply sourcing. The sourcing process begins with a meaningful analysis of your historical consumption, current contract terms and conditions and current market conditions. Your consultant should already know and work with all eligible suppliers in a given territory and have firsthand experience with their capabilities and offerings. This will help you develop realistic expectations and minimize surprises on bid day.
Value-At-Risk
While your purchasing department may be proficient in sourcing many materials and services it is doubtful they follow the volatile energy markets on a daily basis, know all the eligible suppliers, understand how to write a technically-sound RFP or possess the technology needed to create a hyper-competitive environment.
A consultant familiar with prevailing rates can advise when to go out for bid and evaluate the offers you receive. Anything that can be done to shorten the decision making and contract execution processes benefits you the consumer. Due to market volatility, energy offers can usually be honored for less than a day before they must be refreshed. Customers who source on their own tend to have much longer decision-making windows and that results in suppliers adding risk premiums to their bids. The longer it takes to make a decision, the greater exposure there is to rising prices. That exposure is known as "Value-at-Risk" or "Execution Risk" and can be mathematically calculated at a desired confidence level, for a select period of time based on recent market volatility. See this newsletter to learn more about Value-at-Risk.
| Soft-Costs Avoided Sourcing energy internally costs man-hours that could be spent elsewhere in your organization. An energy consultant should not be viewed as an added cost, or a threat to someone's job security, but instead someone that does the heavy lifting while leaving you the power to make decisions. A company's avoided "soft-cost" is significant and worthy of retaining a consultant, but it pales in comparison to the added savings produced by their ability to negotiate lower supply rates. In addition to saving you time and effort, energy experts know how to write technically sound RFPs and sequence online reverse auctions. The proper use of technology produces tremendous price-discovery and a hyper-competitive environment amongst suppliers vying for your business. Online reverse auctions in the hands of experienced professionals have consistently outperformed the results from traditional paper-based RFPs. With no out-of-pocket cost and no obligation to accept an offer, that business model ties your consultant's success directly to yours.
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Return on Investment
The financial impact of using an experienced third-party energy consultant, armed with online reverse auction technology can be very rewarding. Consider the following financial metrics for a range of typical electric sourcing projects:
At the same time your consultant is doing the heavy lifting for your sourcing event, they will also be analyzing your usage to see where else you can find savings. For example, is your facility a good candidate to earn revenue through a Demand Response program, where large electric users reduce their consumption during peak usage events in the summer? Should you be auditing your utility bills with a state-of-the-art energy accounting system to catch bill errors and avoid overpaying? Can your facility benefit from energy efficiency measures? A good consultant can offer a full suite of energy services and help determine which are right for your organization
Independent Energy Consultants, Inc. (IEC) is an independent consulting company licensed to broker and aggregate electric and natural gas contracts in deregulated markets across the United States. Our Certified Energy Managers enable participation in Demand Response programs, perform facility audits, advise on energy efficiency projects, and provide utility accounting and bill auditing services. IEC delivers value in many ways, but primarily by saving clients money on their utility bills while protecting them from risks in the volatile energy markets. Contact us for more information.
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