Like Lewis Carroll, author of Alice in Wonderland, once said, “If you don’t know where you are going, any road will get you there.” This saying holds true when it comes to managing energy costs for your organization. In the spirit of helping you identify and overcome very common potential energy procurement errors, we offer this ten-installment guide. Our first three articles covered the mistakes of not procuring proactively, missing the most competitive rates, and developing an inappropriate procurement strategy for your specific needs.
This, our fourth discussion, will center on the importance of measuring your results. The most effective and direct way to manage energy costs comes in the form of sourcing and procuring energy so that you can negotiate the rate you pay – an exercise performed in markets where electricity and natural gas are deregulated. However, one of the key mistakes made in buying energy is not having a pre-determined goal of what you want to achieve.
The Mistake: You Aren’t Measuring the Results of Your Energy Procurement
Before you can set any goals, and then measure your performance against these goals, you must have the data readily available with which to measure. The error that many procurement managers – yes, even seasoned professionals – make is failing to collect the information that will help them compile the most accurate picture of their organizations’ energy cost management and then measuring those results.
Why It Happens: You Didn’t Set Your Goals in Advance
Results must be measured to a pre-determined goal. Do you want to save 10% on your energy costs? That sounds good, but 10% compared to what?
If you don’t first have a method to collect your data, you have little to compare with. That makes is difficult – if not impossible – to know what your goals should be. Because energy markets are extremely volatile (much more volatile than, say, the Dow Jones or the S&P 500), it becomes even more important that you understand what you are achieving, considering your prices for electricity and natural gas will move up and down over the life of your contract. This movement is in tune, to a certain extent, with the underlying wholesale energy markets.
How to Fix It: Consider YOUR Best Benchmark
For the purposes of measuring procurement results, you need to establish a method for tracking energy usage, spend, rate, and contract information. These data points will allow you to then measure changes in these elements with regards to meeting your goals.
Energy managers and facility departments often use data management systems to track energy usage. Such a data management system can range all the way from an unsophisticated spreadsheet to an elaborate corporate-wide software package. The type of system you use tends to correlate with what you are doing with the data. For organizations that monitor both energy costs and usage, a more detailed system will be beneficial.
Following are some common methods for applying key benchmarks for your energy procurement goals:
Comparing to Your Previous Contract
Comparing your new energy rate to your old energy rate is perhaps the simplest and most straightforward way to measure your performance. If your previous contract for natural gas was $4/Dth, and your new contract is $3/Dth, you have saved $1/Dth. Tracking your energy usage will allow you to quantify the actual savings over the old contract. This method of measurement always looks best when energy markets are moving down. But what do you do when energy markets have moved up since you procured your last contract? In these circumstances, it becomes more important to compare to other variables, such as your estimated budget or market prices themselves.
Comparing to Your Budget
In some organizations, perhaps more important than a comparison to previous costs is a comparison to your budgeted cost. In order to create a budget line item for energy spend, you must understand what contracts are in place, what the energy usage is expected to be, and what rate you will pay for that energy over the next fiscal year. If you start by building your budget based on expectations, when you track actuals, you will see where there are deviations. At the end of the year, if you’ve exceeded your budget, you may find this was no fault of your energy procurement strategy. Rather, it may just be that you used more energy than you expected that year. Don’t punish or blame the procurement – instead, focus on energy efficiency strategies that will keep your usage in check.
Comparing to the Market
Measuring your new rates to previous rates and your budget are clear ways to determine success and potential savings; however, this does not take in to account the continual movement of energy markets for reasons completely out of control of your organization. You will invariably face situations where the market has risen and energy rates are higher than what you secured under your current contract. Comparing your new rate to your old rate may not make as much sense because you know that your new rate will be higher. To show how successful you are in your procurement efforts, knowing where the market price of that energy is during the term of your contract will allow you to see how you are performing. If you secure a fixed rate for electricity of 5 cents/kWh for a 24-month period, and market rates rise to 7 cents over the life of that contract, this comparison will show you that your procurement strategy saved you 2 cents/kWh.
Conclusion: Know Where You’re Going
We started this article with a quote from a famous English author. But now, let’s rely on the words of the great American baseball legend and sage Yogi Berra: “If you don’t know where you are going, you’ll end up someplace else.” As we discuss the top 10 energy buying mistakes, nothing could be worse than not knowing where you’re going – or not even knowing whether you committed a mistake or not. Measuring the results of your energy procurement strategy is the essential first step in evaluating that strategy and then either confirming or adjusting the approach moving forward.
As you read through this series, if you do nothing else, ensure that you have a mechanism in place that allows you to measure your performance against a pre-determined goal so that you know if you have arrived at the right location. If not, as Yogi foresaw, you will end up someplace else.