Energy prices are always moving. The past several years we’ve seen historically low power and natural gas prices. Now, we’re seeing upwards pressures on energy prices as production remains flat, liquefied natural gas and pipeline exports to Mexico are at all-time highs, and as the U.S. is on pace for the sixth warmest summer since 1950, which is driving strong gas-fired power burns, among other factors.
Staying on top of these factors and more makes energy procurement a daunting task at times. Even full-time stock analysts and sports handicappers are right about 50% of the time. A “bad” choice on when to buy can cost your company thousands of dollars today, and into the future, depending on how long your contract lasts. So, how do energy buyers mitigate such risk?
A “bad” choice on when to buy can cost your company thousands of dollars today…and into the future.
Why a managed purchasing strategy works
By deploying a managed, or layered purchasing strategy, energy buyers can effectively manage risk and price. A managed strategy can take a variety of forms—from simple and manual to very complex and automated. The key is that you take a managed approach when buying portions of your energy usage (load).
Instead of looking at buying energy once a year, or every other year, spread your risk and purchasing over time by layering or locking in percentages of your load over time, with the rest subject to market rates. Doing so provides control over energy price changes and lowers overall risk in both price and timing.
According to our Evaluating Power Purchasing Strategies for Your Business White Paper, customers could see a cost avoidance in the range of $30,000 – $50,000 range if they execute a buying strategy, depending on their annual energy consumption
For example, the white paper estimates that customers that consume 7,500 megawatt hours annually could achieve in the range of a $30,000 annual cost avoidance if they were to put a managed purchasing strategy in place rather than using one of the “fix it all at once” approach. However, there are market-related events that may impact the trajectory of these figures, including anomalous weather events such as what was seen in February 2021 with Winter Storm Uri, when prices skyrocketed in Texas and had rippling impacts beyond.
Check out Figure 7 from the white paper below where you can see that the process of layering those purchases significantly lowers risk, while not having a great impact on overall costs.
Figure 7. Constellation’s Evaluating Power Purchasing Strategies for Your Business White Paper
To get started on creating a managed strategy, you should first look at your usage seasonality, hour-by-hour usage and your business’ financial budget. We estimate an effective strategy can be developed with about 20 hours per year, and your Constellation business development manager can guide you along the way.
Additionally, look at the economic and natural gas and power conditions, as well as upcoming weather forecasts impacting energy prices. Constellation updates energy managers with this information every month during our Energy Market Intel Webinars. Knowing the current trends and what’s expected to come are all important to consider when strengthening your energy strategy.
For customers that want further assistance, we also provide customers with a variety of tools to help plan, measure and adjust their strategy over time. Our Information-to-implementation (i2i) is a no-cost reporting service to help you plan your budget and make informed purchasing decisions. One component of the service is the Energy Strategy Planner, which shows your usage and cost over a period of time, typically five years, identifying your expected budget costs under a variety of plans.
In February 2021, Texas suffered a major power crisis. Severe winter storms brought some of the coldest weather the state had experienced since 1989. Consumers turned up their heating systems, increasing energy demand. Meanwhile, the cold weather froze natural gas wells and pipes. Freezing rain followed by extreme cold froze the mechanics of wind turbines and snowfall covered solar farm panels. The loss of generation plants, wind generation and solar energy, in addition to frozen gas pipes, nearly led to a total shutdown of the Electric Reliability Council of Texas (ERCOT) grid. More than 4.5 million homes and businesses were left without power. The market price for energy spiked from the typical $50/MWh up to $9,000/MWh during the storm.
Extreme weather is increasingly affecting energy pricing
The 2021 Texas power crisis is just one example of how U.S. energy pricing is becoming increasingly sensitive to weather events and climate change. Changes in temperature, precipitation, and the frequency and severity of extreme weather events can affect energy supply and demand.
A warmer climate corresponds with rising air and water temperatures. These changes may reduce the efficiency of power production for fossil fuel and nuclear power plants, which use water for cooling.2 If the average climate warms by an average of 1.8°F, U.S. energy demand for heating is expected to trend downward, but energy demand for cooling could increase by about 5-20%, and warming will increase summer peak energy demand in most regions.
Meanwhile, extreme weather events also impact supply and demand, leading to fluctuations in energy prices, as seen with the winter storms of 2021. The frequency of extreme weather events has risen over the past 20 years, driven by rising global temperatures and other climatic changes. Heat waves and large storms are expected to become more frequent and more intense. In 2021, there were 22 separate billion-dollar weather and climate disasters across the U.S.; the previous annual record was 16 events, in 2017 and 2011.
“Summers are becoming hotter and hotter, and now we’re naming hurricanes after letters and numbers,” said Dave Ryan, Constellation’s Chief Meteorologist. “They are getting more and more extreme, and consequently, organizations need the ability to be nimble in times of crisis.”
Limiting fiscal exposure by managing weather risks
Energy prices don’t have to be at the mercy of extreme weather events. There are opportunities for energy managers to be better informed and take action to reduce risks in their energy purchasing.
While Constellation actively communicated with customers when the winter storms struck this year, the sales team is also equally proactive in regularly discussing energy strategy with customers. In addition, staff meteorologists and market analysts regularly share insights during the monthly Energy Market Intel Webinars so customers can better understand the dynamics in the market and plan their energy purchasing.
Beyond information sharing, Constellation has developed an ecosystem of tools and plans to help organizations manage their power purchasing strategy. One of the no-cost resources is the MarketWatch® service, which allows customers to proactively monitor energy prices and make informed purchase decisions when their “strike” prices are close. This service can either send an email notification or purchase on our customers’ behalf when market prices reach the strike price. Another resource available to Constellation’s customers is the Information-to-implementation (i2i) reporting service, which helps customers plan their budget and make informed power-purchasing decisions.
Meanwhile, customers who want to reduce exposure to electricity price volatility may consider Constellation’s structured, systemic Minimize Volatile Pricing (MVPe) plan. With this plan, organizations can lock in higher percentages of load when prices are lower in comparison to historical prices as opposed to basic dollar-cost averaging approaches. Active participation may result in a reduced peak load contribution (PLC) and a lower monthly capacity charge the following year.
“The risk of market volatility is always there, especially during extreme weather events,” says Dave Pfeifer, Vice President and General Manager of the West. “But you can plan your purchases so that you are not buying energy in the eye of the storm when energy demand and prices are highest. There are opportunities to balance the peaks and manage your risk due to climate and weather.”
 Guardian News and Media. (2021, February 20). Why the cold weather caused huge Texas blackouts – a visual explainer. The Guardian. https://www.theguardian.com/us-news/2021/feb/20/texas-power-grid-explainer-winter-weather.
2020 U.S. billion-dollar weather and climate disasters in historical context: NOAA Climate.gov. 2020 U.S. billion-dollar weather and climate disasters in historical context | NOAA Climate.gov. (2021, January 8). https://www.climate.gov/news-features/blogs/beyond-data/2020-us-billion-dollar-weather-and-climate-disasters-historical.
As businesses emerge from the COVID-19 pandemic, they are proactively re-evaluating their energy strategies for two reasons:
Curtailed commercial and industrial demand for energy during the pandemic, creating new volatility in fossil fuel markets. In 2020, demand for energy delivered to the four U.S. end-use sectors (residential, commercial, transportation, and industrial) was down 90% compared to 2019 levels.
A stronger focus on environmental, social, and corporate governance (ESG), along with increased government scrutiny and regulation for carbon emissions is driving the demand for renewables. According to the U.S. Energy Information Administration, the renewables share of U.S. generation will rise from 20% in 2020 to 21% in 2021 and 23% in 2022.
Energy managers are recognizing that they need more than energy. They need a plan—a strategy that balances the pursuit of a sustainable future with the reality of attaining a strong bottom line.
“Sustainability doesn’t mean sacrificing profits or putting success on the back burner,” explains Natalie Chladek, Associate Product Manager at the Harvard Business School. “Instead, it has become a crucial element to any organization’s successful strategy. A business that doesn’t factor in sustainability risks is less successful in several measures, including profitability, growth, and employee retention.”
But what goes into a sustainability plan? According to Raj Bazaj, Executive Director for Solution Sales at Constellation, it’s different for every organization. “Energy sustainability means being able to meet corporate efficiency goals through strategic solutions, including renewable energy options and energy efficiency initiatives. These reduce energy consumption—and thereby a company’s overall carbon footprint.”
The first step in creating a sustainability plan is to review and analyze energy use data. Energy analytics allow businesses to generate insights and inform strategies that can lead to both cost savings and sustainability. For many organizations, a sustainable energy strategy contains two key components:
Energy Efficiency:using a lower quantity of energy to do the same amount of work can help reduce greenhouse gas emissions and therefore safeguard the environment. Energy efficiency is considered the first step when putting together a sustainability plan.
Renewable Energy: energy produced from sources that do not deplete or can be replenished within a human’s lifetime (compared with non-renewable sources like fossil fuels).
The best plans consider both renewable energy sources and efficiency options in coordination with usage habits and budget considerations. Constellation has the expertise, products, and technologies to help energy managers every step of the way. Here are just a few ways Constellation can help:
Knowledge is power. The more energy managers know about their energy usage data and trends, the better they’re equipped to meet savings, risk management, and strategic goals. Through Constellation’s Pear.ai platform one can easily understand the usage trends and see abnormalities when they occur. The continuous monitoring of data and analysis help identify the best areas for implementing energy optimization projects within a facility or between different facilities. This proactive approach helps drive an efficiency strategy that not only lowers carbon usage but also reduce one’s energy bill.
“Increasingly, with a focus on sustainability, our customers want to better understand and control their energy portfolio,” said Bazaj. “The Pear.ai platform effectively and efficiently meets that demand.”
In Middletown, CT, Wesleyan University is already experiencing the benefits of the Pear.ai platform’s functionality. The university operates a multi-faceted utility footprint that includes power, gas, heating oil, propane, solar, and cogeneration powering academic buildings as well as student and faculty housing.
“I went from literally mountains of paper and a grueling 20 hours per month of data entry and accounts payable processing to having the university’s entire energy footprint essentially at my fingertips,” said Jeff Murphy, facilities business manager at Wesleyan.
Efficiency Made Easy
Using less energy can help businesses work toward their sustainability goals. The best news is that efficiency upgrades don’t require prohibitive upfront costs. In fact, Constellation offers efficiency solutions that don’t require upfront costs at all.
Constellation’s Efficiency Made Easy program enables customers to pay for energy conservation measures through monthly charges that appear on their business’ power or natural gas supply bill. Meanwhile, energy managers will realize cost savings by reducing consumption and an improved load profile, which will positively impact future energy costs and environmental goals.
Many companies find on-bill funding as a means to achieve corporate compliance with regulatory requirements, meet established sustainability goals, improve electricity load profile, realize energy cost savings, increase asset valuation, and reduce operation and maintenance (O&M) costs.
In addition to on-bill funding, Constellation can also work with organizations to create customized design/build upgrade solutions if that arrangement is a better fit.
Renewable energy options
Constellation provides renewable energy options for both short- and long-term sustainability goals. These options can be accessed independently or built into an overall sustainability plan leveraging the full range of Constellation expertise and resources.
Solar: Solar energy options are available through Constellation’s Efficiency Made Easy program. The cost of photovotaic (P/V) systems can be included in the regular Constellation power bill.
Constellation Offsite Renewables (CORe): CORe is designed to provide businesses access to offsite renewable energy projects through the simplicity of a retail power contract. Location-specific renewable energy purchases can be combined with renewable energy certificates (RECs) to make a strong sustainability statement. For an even more impactful renewable option, CORe+ supports the development of new build renewable assets through the same retail contract.
Renewable Energy Certificates (RECs): Through the purchase of RECs, businesses can support their sustainability goals by matching their energy usage with renewable energy delivered to the grid. Each REC represents the environmental attributes associated with one megawatt-hour of renewable generation.
Emission-Free Energy Certificates (EFECs): Carbon-Free Electricity Plans from Constellation will be fulfilled through EFECs that are created to represent generating sources that do not directly emit greenhouse gases from combustion.
Sustainability: It starts with a plan
Renewable energy products, customized analytics, and creative cost solutions are all in place. But the first thing every organization needs is a comprehensive plan that will helps them set achievable sustainability goals, maximize resources, and reach those objectives. Constellation can break it all down and provide the turnkey service that makes it easy. To learn more, check out the Supplier to Strategist blog series and subscribe to Constellation’s array of resources here.
U.S. Energy Information Administration (EIA). – Consumption – Energy consumption fell faster than gross domestic product in 2020, and the pace at which both will return to 2019 levels remains uncertain – U.S. Energy Information Administration (EIA). (n.d.). https://www.eia.gov/outlooks/aeo/consumption/sub-topic-01.php.
U.S. Energy Information Administration – EIA – Independent Statistics and Analysis. Short-Term Energy Outlook – U.S. Energy Information Administration (EIA). (n.d.). https://www.eia.gov/outlooks/steo/report/electricity.php.
The Importance of Sustainability in Business: HBS Online. Business Insights – Blog. (2019, November 6). https://online.hbs.edu/blog/post/business-sustainability-strategies.
While the United States has grown its usage of renewable energy over the past decade, the Biden Administration’s new clean energy plan doubles down on that trend by calling for increased federal support for innovative renewable energy technologies.
With this shift in the federal energy policy landscape, businesses have a unique opportunity to evaluate their energy strategies to explore the benefits of these proposed tax incentives and the decreasing cost of renewables.
“The shifts toward renewable energy policies and decreasing renewable energy prices are providing businesses with an opportunity to reduce risk by reevaluating their energy strategies,” said Mark Huston, president of Constellation’s National Retail Energy Business. “If you aren’t ready to invest in renewable energy, the reality is that you are going to find yourselves behind the leaders in your industry.”
Understanding the new administration’s energy policies
The Biden Administration’s renewable energy goals—which include getting the U.S. to complete reliance on clean electricity by 2035 and achieving net-zero emissions worldwide by 2050—are quite ambitious. While many unknowns still remain, here is what we do know about the Biden energy policies.
Within the first week of his administration, President Biden signed a series of executive orders that directed the federal government to: halt new oil and gas leasing on federal lands and waters; consider whether to adjust coal, oil, and gas royalties; and double offshore wind production.
More recently, the U.S. Department of Energy announced $128 million in funding to lower costs and speed the deployment of solar energy technologies. This commitment will accelerate the trend over the past decade, which has seen the cost for solar power drop 82% since 2010, and the costs for onshore and offshore wind drop 39% and 29%, respectively, according to the International Renewable Energy Agency.
Looking forward, the current administration is expected to expand on those initial efforts by proposing a $2 trillion investment in clean energy, requiring aggressive methane pollution limits for new and existing oil and gas operations, and proposing a renewal of tax incentives for clean energy technology.
Renewable energy already makes up 11% of the total U.S. consumption, according to the U.S. Energy Information Administration. With the energy policies proposed by the Biden administration, we can expect that share will only increase at an accelerated rate.
Reevaluating your energy strategy
Reevaluating your energy strategy begins with an assessment of your company’s energy impacts. Key questions to ask include how much energy your company uses, what it costs, and whether you are capitalizing on opportunities to use renewables.
While energy is among the highest business costs, most companies don’t know how to track or manage it effectively. But understanding your company’s energy impact is essential to aligning your strategy with the current U.S. policies.
Taking advantage of clean energy often requires a detailed understanding of new financing options. For instance, power purchase agreements often require companies to commit to buying clean power at a set price for a period of 10 to 20 years. Many business leaders struggle to see the benefits of such long-term financial commitments.
While the reasons why organizations may choose to include renewables in their energy mix vary, most will benefit from such a move.
“Colleges and universities often include significant renewable energy in their energy mix because students have high expectations for their institutions,” Huston said. “Meanwhile, government offices often include renewable sources in their energy strategies to show a tangible commitment to the environment.”
“Constellation can help companies understand how off-site renewable energy, on-site solar facilities, or other renewable sources fit their budgets and sustainability goals.”
Working with an energy expert
Developing an energy strategy that aligns with the new administration’s policy proposals comes with challenges. But these hurdles are not insurmountable.
“Teaming with an energy solutions provider who understands the renewable energy landscape and possesses the data, resources and expertise you need to adapt is critical,” Huston said. “We pride ourselves on simplifying complex energy challenges and helping customers identify the renewable energy option that meets their sustainability goals while managing costs.”
When a national company sought a solution to power hundreds of company-operated stores in Illinois with 100% renewable power, it turned to Constellation’s Offsite Renewables (CORe) product to source 48,000 megawatt hours of carbon-free electricity, annually, from an in-state wind farm.
The renewable energy landscape is changing, but Constellation stays apprised of the latest trends to provide consistent support for businesses who don’t want to overlook the wide-ranging benefits of renewables. Constellation’s CORe product increases access to offsite renewable energy projects through simple retail power contracts and Renewable Energy Certificates (RECs). This solution is just one of many options that can help companies to source renewable energy to support their sustainability goals and become leaders in their industry.
To learn more about Constellation’s Renewable energy solutions, click here.
Renewables Increasingly Beat Even Cheapest Coal Competitors on Cost. Available: https://www.irena.org/newsroom/pressreleases/2020/Jun/Renewables-Increasingly-Beat-Even-Cheapest-Coal-Competitors-on-Cost. [Accessed: 31-Mar-2021]
 “U.S. Energy Information Administration – EIA – Independent Statistics and Analysis,” Renewable energy explained – U.S. Energy Information Administration (EIA). Available: https://www.eia.gov/energyexplained/renewable-sources/. [Accessed: 31-Mar-2021]
In 2020, the COVID-19 pandemic brought unprecedented volatility and uncertainty to energy markets, which our experts detailed early last year and provided guidance for our customers. Electricity usage fell by up to 20% during the stay-at-home orders and crude oil prices fell to a negative value for the first time. But those low prices were only temporary. And today, energy managers are beginning to see the permanent consequences of the pandemic on energy prices.
Now is the time for energy managers to reevaluate their FY2022 energy budgeting approach. They should ensure that they are taking every opportunity to reduce their risk over time.
“The pandemic has been a unique challenge for all energy budgets,” said Mark Huston, President of Constellation’s National Retail Energy Business. “But if seized upon as an opportunity to make needed changes, organizations can position themselves to be more resilient to future market volatility.”
The long-term effects of COVID-19 on energy purchasing
The 2020 energy price downturn will have long-lasting effects as the total U.S. energy consumption is not projected to return to 2019 levels until 2029. Oil producers are taking steps to reduce their financial risk and avoid the volatility they experienced last year. They are moving away from continuous production to prevent overproduction—which will drive prices upward—and adjusting their contract pricing mechanisms to shift more risk to suppliers through demand-based charges.
The power mix temporarily shifted more toward renewables during the lockdowns, and U.S. renewable energy infrastructure investments are expected to continue, driven by sustainability initiatives and favorable government policies that incentivize the adoption of renewables and carbon reduction.
Meanwhile, many organizations are facing tighter budgets. About 80% of manufacturers—who use one-third of all energy in the U.S.—believe the pandemic will have a lasting impact on their businesses.
Likewise, state and local governments are facing projected tax revenue decreases of $167 billion in 2021 and $145 billion in 2022, with many relying on federal grants to offset those losses and lessen their financial strain.
Looking ahead to 2022, energy managers in manufacturing, government and other sectors have an opportunity to reduce costs and risks through innovative, long-term energy planning. Taking a more flexible approach to energy purchasing allows companies to think further into the future, buy energy at regular intervals and take advantage of market opportunities.
“Flexible strategies are designed to offer risk protection,” said Huston. “Using a flexible approach allows organizations to take advantage of the benefits of price declines like we saw in 2020 and mitigate any increases over time.”
“With these drivers in mind, Constellation is working with customers to create an energy strategy that includes price risk strategies and sustainability options.”
Protecting your business from future volatility
While a flexible approach to energy purchasing can help protect against market volatility, there is no one-size-fits-all approach. Every company is unique and will benefit from a customized strategy suited to its needs.
Some organizations may benefit from looking at the most significant driver of their total gas price—the commodity component—to achieve price stability over time. They can purchase energy using either a straight-cost averaging or modified-cost averaging approach, in which they buy less when prices are high and more when prices are low.
Other energy managers may prefer proactively monitoring the forward power markets to make more informed purchase decisions. Still, others might be ready to capitalize on the continued momentum towards renewable energy options that support their short- and long-term environmental goals or commitments.
As we come out of a year where the energy price showed unprecedented volatility, all organizations can become more resilient by making smarter energy purchasing decisions.
“With these drivers in mind, Constellation is working with customers to create an energy strategy that includes price risk strategies and sustainability options,” said Huston. “We’ve got the knowledge and the innovative solutions to help energy planners solve their most pressing energy purchasing problems.”