SWITCHING ON ENERGY SOLUTIONS:DEVELOPING YOUR ENERGY PROCUREMENT STRATEGY

SWITCHING ON ENERGY SOLUTIONS:
DEVELOPING YOUR ENERGY PROCUREMENT STRATEGY

By Al Rickard

Cold Chain companies have been buffeted during the past year with wild swings in energy prices and seasonal swings are bound to be felt this year as well.

What’s the best strategy to deal with this?

The most important step is to have a strategy, which many organizations don’t.

“Energy costs are probably the second-highest cost item for most public refrigerated warehouses, yet they are likely paying way too much for their energy,” says Michael Webster, President/CTO of Iceted.com, Inc., which runs an energy management program in partnership with IARW. “PRWs should take advantage of the current energy market to begin a real risk management discipline when it comes to buying energy.”



Eric Rothschild of GDS Associated, Inc., a multi-service consulting and engineering firm, adds, “Refrigeration and freezer facilities are in a strong buying position because the mix of energy usage during both peak and off-peak hours leads to a high load factor. High load factor customers are very attractive to retail electricity providers in deregulated markets.”

Icetec recently hired David Ferro, who has eight years experience with Hess Corporation as a national accounts manager, where he was responsible for more than, 5,000 accounts for power, natural gas, and oil commodities.

He helped Icetec create a budget database system that is now available to clients. This is a comprehensive tool where companies enter their expected energy use figures and the database system connects to wholesale power and commodity markets and updated their budget cost on a daily basis. The database also tracks forward purchases, reconciles actual cost, and creates variance reports.

“We are currently using it to perform risk management not only for this fiscal year, but 2010 and 2011 as well” Webster says. “Some of our clients who normally do not use longer-term strategies are using them with us to purchase energy using a layered strategy.”

A discipline of layering purchases based upon both technical and fundamental factors does not seek to pick the top or the bottom of a market. In fact, it is the opposite of a trader mentality. It reduces risk and provides consistent economic performance.

“A customer needs to be able to accurately forecast its future power costs to budget to expenses,” Rothschild notes. “Since prices have come down nearly 50 percent from the last summer spike, it may be time to consider a new contract or to extend the current one.”

In doing this, however, Webster cautions against a common mistake made by companies in purchasing energy commodities, which is buying too much in an upward market.

“This is usually driven by fear,” he says. “Once rising forward energy prices begin to affect the profit structure, the reaction is to protect the budget and cut losses. This is almost always the worst thing to do. Today’s energy market is even more dangerous because companies are lulled into a sense of complacency and are not compelled t stick to a discipline of risk management. Or the opposite- they overbuy too far into the future.”

Rothschild adds that other strategies for achieving energy costs savings include improving energy; taking part in demand response program, or other special programs; and, distribution fees, and taking measures to change or correct extraneous fees like power factor adjustments.

Webster agrees, explaining that refrigeration clients usually have more options because they can be flexible.
“Flexibility acts as a key physical hedge,” he says, “and should be an integral part of a risk management strategy. The cold chain industry is also an industry that can make great strides in efficiency, as it lags other industries in this regard.”

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Al Rickard ( This email address is being protected from spambots. You need JavaScript enabled to view it. ) is president of Association Vision and editor-in-chief of Cold Facts.

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