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Energy Procurement Mistakes You Didn’t Realize You Were Making (and How to Avoid Them): # 5 – Using Energy Aggregations

Everybody makes mistakes. The key, as they say, is to learn from our mistakes. In this spirit, we are presenting this series of articles to help you identify some of the errors you might be making so you can break the cycle. The first four articles discussed the mistakes of not procuring proactively, missing the most competitive rates, developing an inappropriate energy procurement strategy for your specific needs, and not having a pre-determined goal of what you want to achieve. In this fifth installment, we’ll examine some common mistakes associated with energy aggregations – and share strategies for avoiding them.

What is an Energy Aggregation?

An energy aggregation is a type of cooperative purchasing strategy. Because of the efficiency it brings to procurement, cooperative purchasing has grown tremendously over the years. There are now plenty of cooperative programs available, ranging from the General Services Administration (GSA’s) schedule contracts to group purchasing organizations (GPOs) made up of members from particular industries such as healthcare and manufacturing. Within each state, there are local, regional, and statewide cooperative purchasing groups and GPOs, where many organizations seek to purchase goods and services. The draw to these cooperative programs is that they save time and they save money: Time-consuming contracts have already been “pre-procured,” and pricing is based on the leverage of the whole membership.

The Mistake: Using an Energy Aggregation When You Don’t Have To

Because of the prevalence and benefits to cooperatives and GPOs, many organizations extend this rationale to the use of energy aggregations for procuring energy. In almost every circumstance, the decision to use an aggregation is made without first establishing the mechanism for logically determining whether this is, in fact, the best course of action for the organization.

Why It Happens: You Think You Will Get a Better Price with a Group

The thought is that “the aggregation will take care of the procurement process for me, and we will get better pricing because it will leverage the size of the group.” So in an effort to save time and money, many entities jump into popular energy aggregations designed around their industry or their region. Unfortunately, many organizations hear of the potential benefits in cost-savings and decide to move forward, only to forget to follow up to determine if it was really the best direction to go.

How to Fix It: Understand Your Situation

By default, energy aggregations create contracts that are geared toward the “average” member of the group – which means that the particular terms and conditions may or may not be a good fit for you individually. If you are an organization with very particular needs or goals, and one that likes to make sure contracts are designed specifically for you, then an energy aggregation may not be the best choice.

Only by understanding your individual situation, can you best determine if an energy aggregation is the way for you to go. A good start to any energy procurement strategy is understanding your goals and objectives, along with your risk tolerance. This will lead you to focus on what types of contracts are best for your organization (fixed price or index? long- or short-term?) and the particular terms and conditions you may need.

Below are two key questions to ask that will further guide you to the right decision regarding the use of an energy aggregation:

Is My Energy Load Conducive to an Aggregation Approach?

In general, an energy aggregation is getting better pricing for smaller entities by lumping them in with larger entities – creating an aggregate price that may be higher than what that larger entity would get on its own. However, energy suppliers often offer their best pricing by having greater certainty around your usage of energy (when and how you use it). While creating a larger load, an aggregation can also create greater uncertainty around when that energy is used, leading to higher pricing. In practice, if your organization is a significant user of energy, you will receive better pricing by approaching energy suppliers directly – not as part of an aggregate group.

How Do I Still Save Time Without Committing to an Aggregation?

We talked about how taking an individual approach to procuring energy is, in most instances, the best method to use that will save you the most money. The other question now is how do you save time?

Saving time can be just as important as saving money in an organizational operation. Using an energy aggregation saves time – so if you decide not to use it, you must spend all your time focusing on the procurement process, right? This is where engaging the services of a quality energy advisor can be crucial to your energy procurement process. A good advisor will help analyze the best process for your organization to use and then coordinate the process. The best energy advisors use their size and scale to create greater competition for your organization, while also identifying the best times in the market to procure. The end result saves you time and money by taking an individualized approach tailored to your organizational needs.

Conclusion: Do the Best Thing for Your Organization

Remember, it’s not always the lowest price that makes an energy plan the best value. The use of an energy aggregation works for some organizations and not for others.

The key takeaway is that you need to really analyze and understand your situation so you can make an educated decision about whether an aggregation is the best energy procurement decision for you. If you are working with an energy advisor, ask them their thoughts about a particular aggregation and its pros and cons. There is a lot of value to steering your own ship, and for this reason alone, many organizations forgo the allure of the aggregation. Once you’ve made a decision, you can then move forward with implementing the best strategy for your organization.

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