Published In:
CFO Date Published:
15th May 2002 Author:
Simon Segal
Australia's energy industry is rationalising into fewer but larger retailers offering total energy packages. Companies are negotiating in a climate of rising energy prices as retailers are far less inclined to adopt a marketing strategy of taking losses to secure business.
Harry Perry: Businesses should take a more aggressive stance in buying electricity
Data from the energy and telecommunications consultant NUS Consulting shows electricity prices in Victoria and NSW rose 3.8 per cent and 4.8 per cent, respectively, over the 12 months to April 2001. Some states - notably Victoria and South Australia - have tight supply situations.
In such a climate, Harry Perry, production manager at NUS Consulting Group, argues, "businesses should take a more aggressive stance in buying electricity. 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 that the necessary supply is available."
This is a global trend. NUS Consulting co-president Richard Soultanian finds that "throughout the world, companies are realising that a service that was taken for granted is now a vital commodity that requires numerous hours of preparation to secure".
George Beyrouthi, an energy specialist at Expense Reduction Analysts, says cost saving around energy "requires patience, as the payback period for energy control system investments is between one and two-and-a-half years depending on the hours of usage. The energy category is not only complicated but requires intricate and detailed thought and procedures to be implemented in order to succeed."
Beyrouthi's starting point for managing energy costs at a company is to review consumption of both electricity and gas for the previous 12 months. "From this, a detailed load profile can be produced and analysed," he says. "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."
Beyrouthi identifies the major energy savings opportunities as 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 how many days a week the business operates: the number of shifts per day; annual electricity consumption (in kWh); whether the firm operates peak, shoulder or off-peak tariffs; the average monthly demand in kW; whether charges are in kW or KVA max demand; the length of the contract with the electricity provider; and the power factor in the enterprise.
Of the latter, Beyrouthi 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 its plant and its consumption of electricity.
"Where competition is relevant, make sure you negotiate the best tariff based on assumed trends and risks and the optimum length of contract. Remember that this will include various peak, shoulder and off-peak tiers."
Negotiating with the energy companies is not without its pitfalls. Contracts, notes Perry, are typically negotiated for three-year periods and, with electricity retailers, the charges for use of the network, transmission and distribution are fixed and non-negotiable. In this tightly regulated market all retailers charge the same. It is thus only charges for energy consumption that, like other commodities, are negotiable with the retailers.
Among Australia's 12 active energy retailers, Perry finds, prices vary around 20 per cent. "The major retailers, however, charge in a similar range and fix their prices for a fixed term," he says.
"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."
Perry cautions against trading energy. "With prices fluctuating daily, it is impossible to monitor without significant knowledge of how the spot energy market operates. The pitfalls and risks are huge. The best a financial officer can do around managing energy costs is do homework prior to reviewing the energy contract. This is far more valuable time spent than trading."
Perry highlights key stages prior to negotiating an energy contract: Know the retailer, the alternatives and why you are choosing one over another. Discuss consumption patterns and needs with them.
Offers are typically valid for two weeks. This is a tight time scale, so immediate action is required. "At this stage, it is also important to check if the offers include line-loss factors - 100 kW of electricity leaving the generator does not end up as 100 kW of electricity at the meter box. One retailer may include estimated line losses in its offer, while another may not.
"Finally, when you accept an offer and receive the retailer's contract for signing, ensure the contract matches what was agreed."
Technology Help
Smart use of more sophisticated technology plays a major role in managing energy costs. The consultancy Expense Reduction Analysts (ERA) highlights developments:
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 when not required.
The LIGHT ECO device cuts lighting energy bills by about 30 per cent where fluorescent lighting circuits are used.
Inefficient lighting ballasts should be replaced with electronic type or the installation of metal halide lamps.
Triphosphor tubes save energy in external and internal signage.
Air-conditioning control systems should have schedules adjusted to better reflect occupancy times.
Use high-energy efficiency motors.
Maintain compressed-air efficiency.
Install equipment that cuts voltage surges, thus reducing downtime interruptions.
Use solar hot water booster systems.
Capacitors that improve the power factor reduce the KVA maximum demand.
Load management units can monitor and warn when approaching a pre-set load limit. The unit can shed some load within a plant for a short duration and until the overall consumption is reduced.
ERA's list of things management needs to be careful about include:
Current energy consumption versus future consumption.
