Published In:
CFO Date Published:
20th December 2002 Author:
Simon Segal
Managing corporate energy costs is becoming increasingly complex as opportunities open up at a time when the country's energy industry is rationalising into fewer but larger retailers offering total energy packages.
In Australia's newly deregulated energy environment, corporations are far better positioned to negotiate energy prices. They no longer have to accept the first offer from their existing supplier, or fixed-price, fixed-term contracts, and are better positioned to negotiate aggressively.
Harry Perry, production manager at NUS Consulting Group, argues: "The time has passed when a manager could simply rely on the benefits of a declining market. Time and resources are needed not only to ensure the lowest possible price but also the necessary supply is available. There is no longer such a thing as loyalty to a particular retailer. The incumbent supplier is not owed anything."
Negotiating with the energy companies contains pitfalls. Contracts, notes Perry, are typically negotiated up to a three-year period. Network, transmission and distribution charges are still fixed and non-negotiable. It is thus only charges for energy consumption that, like other commodities, can be negotiated with the retailers. Perry finds that prices among Australia's 12 active energy retailers vary around 20 per cent.
"The major retailers, however, charge in a similar range and fix their prices for a fixed term. At any time, there may be little difference between the best priced retailers, but a significant difference between the best and worst priced. Identifying which retailers are offering the sharpest prices takes time, patience and market knowledge, as does choosing the appropriate contract term."
George Beyrouthi, energy specialist at Expense Reduction Analysis (ERA), emphasises that a "proper understanding of the energy industry and its future direction will enable a sound risk aversion and appropriate contract terms. Network, transmission and distribution charges are non negotiable and costs are regulated once a year. Choosing the correct tariff is also important in negotiating a contract with the retailer."
Perry highlights three stages before negotiating an energy contract: know the participating retailer, the alternatives and why you are choosing one over another. Discuss consumption patterns and needs with them.
Major savings can be identified through improving the efficiency of energy consumption. While the negotiations over actual rates will offer immediate savings, improving efficiencies require a short time (usually less than a three-year payback period) to recoup the capital investment.
Beyrouthi finds cost savings around energy are achievable provided a detailed and proper analysis of one's own consumption profile is carried out and enough data is supplied to the bidding energy retailers. "From this, a detailed load profile can be produced and analysed.
The data is then reviewed in regard to the company's operational requirements. With such an understanding the corporation is then in a stronger position to submit a brief to the market for quotes." He identifies the major energy savings opportunities being in power factor correction, load management, air- conditioning efficiency improvement, heat recovery from process heating, improvements in compressed air efficiency and use, and reduction of lost production (voltage transients).
Given this, Beyrouthi's list of key issues for management to consider are the number of days a week the business operates, the number of shifts per day, annual electricity consumption (in kWh), the average monthly demand in kW, whether charges are in kW or kVA max demand, the length of contract with the electricity provider, and the power factor in the enterprise.
Elaborating on the latter, he says, "it is often worthwhile conducting an engineering analysis to profile the load and recommend a suitable engineering solution. The company is then in a stronger position to go out to tender to install what is required to improve the efficiency of their plant and their consumption of electricity. Where competition is relevant, make sure that you negotiate the best tariff based on assumed trends and risks and the optimum length of contract. Remember that this will include peak, shoulder and off-peak tiers."
Finally, smart use of more sophisticated technology plays a major role in managing energy costs. For instance, microprocessor-based, programmable energy management tools are capable of displaying, logging, alarming and controlling automatically the electrical energy demand. Sophisticated energy monitoring and demand management systems help reduce peak usage. Duplicate meters on the load side can double check the energy quantities being charged by the electricity retailer. Occupancy detectors on light switches can turn off when no use is being made in the areas of lighting. Photoelectric sensors measure natural light and dim the electric lights accordingly.
The list of such technological assistance is endless. Ultimately the cost savings resulting from the technology has to outweigh the costs of the technology itself.
