Managing Risk: The Right Energy Strategy for Your Business

How an energy supplier can help protect you from risk

If you’re responsible for your company’s energy decisions and strategy – or are just dipping your toes in the energy-management waters – you know that energy markets are volatile. You know, too, that this volatility poses risks for your business’ bottom line and can negatively affect your ability to manage operating expenses.

What you may not know is that you and your energy supplier can craft a strategy to shield you from market risks. Even if weather is unpredictable, demand outpaces supply and global markets fluctuate wildly, it is possible to protect your business from unexpected costs.

But which approach is best for managing long-term price risk? Let’s jump in.

Common approaches to buying energy

There are two common strategies businesses use to buy their energy: a fixed-price point-in-time strategy and a flexible buying strategy. When analyzing strategies for your business, it’s important to consider whether you want to lock in the various cost components or ride the market. In other words, you need to decide if you want to fix, float, or choose a combination of the two.

The fixed-price strategy

With this approach, you’re choosing cost certainty by locking in several years’ worth of energy at the current price for the length of your contract. If you make your purchase when rates are low, you'll benefit from that lower rate for your entire term.

By choosing to fix cost components, you are locking into a set rate per kilowatt hour (kWh) for electricity, or per CCF/MCF/Therm/Dekatherm for natural gas.

Your monthly bill still varies – based on your consumption – but the rate you pay stays constant regardless of what happens in the market.

This strategy is best for organizations who are seeking a stable bill each month. This may be suitable for your business if you have a low risk tolerance, seek budget certainty or don’t want to take an active role in managing your day-to-day energy costs.

Keep in mind that timing is everything. You want to lock in when rates are low and flat or falling for the period you’re considering. Long-term price certainty may come with a price premium.

The flexible strategy

Often also referred to as a variable approach, this strategy requires you (and your energy supplier) to make multiple purchases over time. Doing so offers you the flexibility to respond in real-time to market conditions.

Unlike a fixed strategy, a variable strategy is one in which pricing is tied to market rates – and is therefore changing constantly based on supply and demand. Your monthly bill varies based on both your consumption and the market rate. Because of the constant fluctuations, it is likely that your bill will look different from month to month, even if you consume the exact same amount of energy.

This strategy is beneficial if you want to take an active role in the management of your organization’s energy. By actively watching the market, the variable rate can help you take advantage of market volatility.

This may be suitable for your business if you have a higher risk appetite, can be nimble in adjusting your usage according to market conditions and have a clear understanding of the energy market. If a spike in energy prices presents a significant risk to your business, this plan may not be right for you.

Businesses using a variable strategy often sign a contract but have the option to lock in a fixed price at any time.

Why not both? A hybrid approach to buying energy

Another option is a combination strategy that combines elements of fixed pricing with variable pricing under one contract. You can customize a plan for your business by fixing some components while floating others.

Some suppliers may allow you to buy a block of your energy at a fixed price, while usage that exceeds your designated usage is billed at the market price. You have access to wholesale market pricing and the option to fix or float as much of your energy as you choose, based on your risk tolerance and business goals.

How to make the right energy choice for your business

Regardless of your approach, work with a supplier that will treat you as a partner in the process and lead with transparency.

Ultimately, you want a strategy that is customized to your business, your goals and your tolerance for risk.

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