What Is Energy Procurement and How Does It Work?

Aaron Stahl / Utility / September 9, 2022

Running a business is all about making strategic decisions to get closer to your organization’s goals. Many of these decisions come down to lowering costs, which in turn increases your bottom line. But the decisions are seemingly endless, and sometimes it makes more sense to consult an expert.

Energy procurement can be particularly overwhelming for business owners. Luckily for you, we got energy procurement experts here at P3 Cost Analysts to help you out. Here, we’re breaking down the basics of energy sourcing so you can understand the market better. If you still need help navigating the waters, we’ve got your back.

What Is Energy Procurement?

Energy procurement is the process of formulating a strategy to find the lowest pricing and best sources for your business’s specific energy needs. It involves dealing with local distribution companies (LDC) or third-party suppliers to make the smartest purchasing decisions based on a company’s particular requirements.

While it may seem straightforward, most business owners and employees don’t have the necessary expertise to navigate the strict regulations and ever-changing market. Many states are revising their regulations to provide a more fair market, making it harder to keep up with the current opportunities available. On top of that, the industry continues to evolve every year as we slowly transition to using more renewable energy opportunities.

Regulated vs. Deregulated Markets

The first step toward understanding energy procurement is to determine whether your company is in a regulated or deregulated state. To someone unfamiliar with the terms, having a regulated market might sound beneficial. However, in a regulated market, there is only one utility provider that has been granted a monopoly in that state. When a single utility company owns an entire state’s power supply chain, businesses are forced to do business with that entity.

In a deregulated market, a state has allowed multiple third-party companies to provide energy at their own rates. While typically there is still only one primary energy provider, the availability of multiple suppliers gives businesses the freedom to decide which they choose to purchase from. This competition tends to encourage lower pricing.

Each state has its own laws on whether the energy market is regulated or unregulated. Either way, the responsibility lies on the consumer to find savings.

The Different Entities Involved in Energy Sourcing

Where you source your energy depends a lot on whether your company is based in a regulated or deregulated state. In a regulated state, businesses must purchase directly from the utility company. In deregulated states, there is the option to shop around for the best prices. Of course, it’s not that straightforward – there are also states that are partially regulated and deregulated.

  • Utility companies: The local distribution company (LDC) will be your default supplier unless you live in a deregulated state and opt to work with a third-party supplier. In this case, the LDC will be responsible for both supply and distribution.
  • Suppliers: In a deregulated market, there are also private energy companies that you can work with as an alternative to your LDC. While these third-party suppliers still provide gas or electricity through the local utility company’s infrastructure, they’re free to make their own pricing for their customers.
  • Energy brokers: Third-party energy procurement experts can help businesses find the most efficient energy solutions for their specific needs. They connect buyers with LDCs or third-party suppliers that offer the best rates for their clients and help them negotiate contract terms.
  • Energy consultants: There is some overlap between an energy consultant and a broker. Many brokers offer consultancy services, but here the focus is to advise businesses on how to understand and lower their energy usage.
  • Customers: This is the business or organization that is looking to purchase energy or a representative the business hired to handle energy sourcing.

What Types of Businesses Benefit From Energy Procurement?

If you’re in the business of making money, then a proper energy procurement strategy can benefit you. You can see substantial savings even if you don’t think your company uses that much energy.

But it’s not just for companies looking to improve their bottom line. Governments, schools, and nonprofits can also lower their costs, allowing them to reallocate parts of their budget to other needs.

How Energy Procurement Works

The energy procurement process is designed to help businesses reach a more cost-efficient energy plan. In order to do this, it’s essential to focus on a business’s specialized needs. Therefore, an energy procurement service must first conduct a deep analysis of a company to determine its usage patterns and develop a tailored plan. The goal is to lower the risk of unexpected charges and help businesses better predict their monthly costs.

From there, it’s time to focus on energy sourcing. Once again, this will depend on whether the business is in a regulated or deregulated state. The energy procurement service must evaluate potential vendors to see which offers the most competitive pricing for the business’s specific needs.

The energy procurement services provider you’re working with will then help negotiate a contract with your chosen provider for electricity, natural gas, and any renewable sources you may use. After your contract is secured, the procurement company will continue to monitor your energy usage, invoices, and the market and help with any renewal needs.

Traditionally, this process focused on gas or electric procurement. Now, companies may consider entering the clean energy market. Securing assistance with an energy procurement service can help businesses navigate the new and complex sustainable energy market.

Types of Energy Procurement Contracts

Choosing the right energy plan involves more than just finding the vendor with the lowest price. You have to consider different types of contracts that are available. There isn’t one clear winner here – it depends on your specific energy requirements, property-specific demands, risk aversion, and market drivers. Contacts fall under three categories:

  • Fixed rate: With a fixed-rate contract, you’ll have one set energy rate consistently throughout the predetermined period. You will be charged this fixed rate based on your usage. Opting for a fixed-rate contract may be ideal if you expect the market rate of gas or electricity to rise over the course of your contract. However, if the market rate decreases, you’ll be stuck paying higher prices.
  • Variable rate: Like fixed rates, you’ll pay a specific rate no matter how much energy you use. However, the rate you pay will change each month. This allows businesses the opportunity to change providers any month but is a bit riskier as prices may jump from one month to the next.
  • Indexed: These contracts are determined entirely by market conditions. Like variable rates, the cost per unit will change each month. However, the pricing changes and uses a formula related to the market settlement price. This contract plan can result in significant shifts in costs from month to month but, if leveraged correctly, can result in considerable savings.
  • Block and index: This strategy combines fixed rate and indexed pricing. Buyers can purchase blocks of energy at a fixed rate while the rest is bought based on market pricing. The blocks act as a hedge against high-priced time periods.

Benefits of Working With an Energy Procurement Company

Businesses that don’t have a full-time energy procurement expert should consider working with an energy procurement company. As this process can be complicated and time-consuming, hiring a third party can allow your employees to focus on their job at hand. Benefits of working with an energy procurement company include:

  • Develop solid energy procurement strategies: It’s not just about finding the lowest price. It’s about connecting with the best suppliers for your business’s specific energy needs. With the right strategy, you can take control of your contract terms and costs.
  • Understand your options: Whether you’re overwhelmed by too many choices or are forced to work with an LCD and don’t realize you have options available to you, it can be challenging to decide which companies to work with. An energy procurement service provider will help you compare your options to make an informed decision.
  • Reduce energy costs: The main goal of working with energy procurement companies is to save money on electric, gas, and renewable resources. While cutting back on usage may make a small dent in costs, the real savings are to be found through proper procurement.
  • Improve load forecasting: With the help of an energy procurement company, your business can minimize risks and make better predictions about energy consumption and costs.
  • Take back control from vendors: Don’t sit back and blindly pay what your energy providers are demanding from you. Energy procurement companies make choosing a vendor and negotiating contracts much more simple for your business.

P3 Cost Analyst’s Energy Procurement Process

Working with P3 Cost Analysts as your company’s energy procurement experts is one of the smartest business decisions you can make. Our utility auditing services follow a very similar format to that of energy procurement companies. We will follow the best process for your business depending on whether your company is in a regulated or deregulated market.

Regulated Markets

P3 will comb through the last 12 – 36 months of invoices (depending on your state) in order to discover any overages or errors that have been incorrectly charged to your account. After that, we will continue monitoring invoices as they’re received each month to ensure maximum savings. For regulated markets, energy audits require no upfront costs on your behalf. Instead, P3 simply shares a portion of the savings we find you.

Deregulated Markets

P3 will act as your energy broker to ensure that you find the best pricing on the market for your company’s specific usages. We will focus on finding the right time to lock into a contract to ensure that you’re not overpaying for your business’s energy needs. For energy broker services, P3 will collect a small commission.

Leave Energy Procurement to the Experts

Energy sourcing is already confusing and complicated as it is. Still, new regulations and advancing technology each year make it harder for the average business person to understand the industry. There are just too many moving parts for businesses to leave gas and electricity procurement services as an in-house job.

No matter what type of business or organization you’re running, it can benefit from an energy procurement company’s assistance. They will help you navigate the different kinds of contract rates and deliver benefits such as helping develop strategies, understanding options, reducing costs, improving forecasts, and taking back control over your energy costs.

If you’re ready to have one of P3’s utility expense audit experts help you sift through the complicated energy procurement process, schedule a free consultation with us today.

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