Strategically Sourcing Electricity in Deregulated Markets
by Rick Ankrum, C.P.M., A.P.P.
Maximize value, minimize cost
© 2011 Email @ dot com, LLC
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Published by
Email @ dot com, LLC
Kingwood, Texas
Cover Art: Rick Ankrum
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Table of Contents
Should electricity be strategically sourced?
Determine the sourcing goals and strategy:
Gather information about electricity consumption:
Executing the purchase agreement:
Should electricity be strategically sourced?
This question will need to be addressed before you engage in this activity. If electricity is a major cost component in your company's activities then the potential for strategically sourcing exists.
What constitutes a major cost? If the cost savings opportunities are large enough to impact your organization's profit then this is a material component and should be considered. Once this is decided then the next step is to source this internally or to rely on outside resources.
Some examples of where electricity could be an important component:
--large cold storage warehouse
--plastic extrusion
--injection molding
--manufacturing plants
--large retail stores
--chemical plants and refineries
One of the sales points outside resources will make is the time you will not have to expend sourcing electricity when they are your agent. While this can be true you will still expend time managing the outsource agent. Also if this is a main internal job activity then you do not necessarily need their help. If you are not managing this project will what you be doing?
Assemble the sourcing team:
After you have determined that electricity should be strategically sourced and managed, a sourcing team should be assembled. Th reason for a team is that no one department or person has the full picture of what this activity will mean to the organization. Each team member has knowledge and input. Will this make the process fast and easy? Most likely it will not but it will offer each department and function in the organization the opportunity to participate, contribute, and understand the reasons for the activity. These people can then be champions in their department and the company overall.
Along the way you may find a person who is against the project. If this person is an influencer you should consider adding them to the team. This will allow this person to see firsthand what the team is doing, offer their perspective and maybe win them over.
Depending on the authority and responsibilities of the sourcing members an executive sponsor will help determine the priorities and involvement of the stakeholders. Stakeholders could include:
--operations/manufacturing
--facilities
-- accounting
--sales
-- sourcing
--legal
Each of these can contribute valuable information about how electricity decisions will impact the company both internally and externally.
Operations and facilities determine and control electricity consumption which in turn can impact the pricing and contract terms and condition. Their information will provide the basis for the Request for Pricing.
Accounting will pay the invoices so they need to understand invoicing and payment terms. Depending on the contract you negotiate, they will want to know about the forward purchasing commitment being made. This could require mark-to-market accounting actions or derivative accounting. Your organization may not be comfortable with the accounting rules for these types of contracts. Conservative accounting may dictate that the forward purchase time period not exceed a certain number of months such as twelve months.
Your company's credit rating will play a critical part in the pricing you will receive from suppliers so accounting needs to be informed. The credit rating of the suppliers will also impact the pricing they offer you as well. If their credit is poor the price will be higher and maybe some contract options will not be offered. An example: 100% full requirements contracts may not be offered if your company has a poor credit rating since the supplier is hedging your projected needs to fulfill your electricity needs.
While the involvement of sales may not be evident this could become important if your organization wants to participate in a demand response program. Sometimes this program can require a participant to curtail their electricity usage for short periods of time and this could affect customers. The sales department may be fielding questions from customers about how your organization is handling environmental issues and this will enable them to have a full view of the many aspects of energy purchasing and usage.