Thought Leadership Energy Procurement for Municipalities

Energy Procurement for Municipalities

By Chris Doyle

As consumers, we have all done something like this.  It’s Friday afternoon, and you are driving home from the office, your mind is consumed with the news on the radio and your plans for the night.  You look down at the fuel gauge and realize you need fuel.  In the distance, you spot a busy intersection with four gas stations, one on each corner.  As you approach the intersection, you gaze quickly at the price per gallon of each, and notice that one station has fuel for $3.22, and its closest competitor is at $3.32.  There is one minor detail.  The place with the cheapest gasoline is through the light and an annoying turn across traffic, naturally the most inconvenient of the four choices.  Yet you subconsciously find yourself making that turn across four lanes of traffic, for a total savings of $2.00.  Why was it so easy to justify turning across four lanes of traffic, spending an extra two or three minutes out of your day, just to save $2.00?  Most often, it is because you bought cheaper gasoline, right?  Absolutely!  In addition, the minor inconvenience was not enough to outweigh the sense of accomplishment.  Do you think in the same terms about the way your facility buys energy?  If you do not think this way, I encourage you to keep reading. 

For municipal officials, understanding your energy spend, rate structure and energy need could mean significant savings in monthly utility bills and reducing the financial burden of building operating costs.  Municipalities across the country are overpaying every month for electricity and natural gas because they do not understand their utility bills, energy rates and competitive pricing options available to them. 

This article addresses the specifics of electricity but natural gas structure is remarkably similar. In a deregulated market there is one transmission and distribution provider and multiple retail providers that sell electricity or gas competitively to consumers.  Your transmission and distribution provider is more than likely a household name and many have retail provider subsidiaries and customers do not even know the difference.  Energy procurement is the process of soliciting your electricity and gas rates to all retail providers competitively to ensure you are getting the best deal.  The solicitation process does not cost the building owner any upfront costs as they will typically utilize the services of an energy consultant to facilitate the solicitation and their fee is often paid off savings or a fee from the awarded Retail Provider. 

Many different factors affect energy purchasing.  These purchasing factors will be dependent on your facility’s needs.  We have listed a few of the purchasing factors below: 

  • Fixed price – A fixed energy price allows municipalities and other businesses to have budget certainty by locking a set price/kwh during a designated contract term. 
  • Index price – Index-pricing is where a company pays the varying market price of electricity each given time fluctuation provides businesses with the flexibility to conserve or increase usage and take advantage of market dips and spikes. 
  • Flexible index price- this pricing option offers the potential rewards of both budget stability and purchasing flexibility.  Regulations allow businesses to fix varying load, following electricity usage up to 100%.  By not locking in your electric usage at once, you can actively manage energy costs based on market driven opportunities.

Typically, commercial buildings are charged by kW/hr. usage and peak demand over that billing cycles time.  Peak demand means the highest draw of electricity at any given time, usually 15-minute intervals.  This is extremely important to recognize and understand so that you are not needlessly spending money on peak demand usage. 

Understanding how your utility bill is structured will allow you to empower your facility managers to understand the cost of energy usage.  For example, running a water pump for a small fishpond outside could cost only an average of $3/hour in usage.  Shutting the pump down for three hours a day may only save $9 day in usage but because it contributes to peak demand, it could save an average of $50 day in demand shedding. 

Even the most sophisticated energy manager will admit purchasing and managing a utility procurement can take years to master. The first step is to review your electricity bill and consult with your Retail Provider to ask what each line item represents. The second step is to recognize that unless you have an experience Energy Manager on staff you will most likely need to seek outside assistance in determining if your current rate and rate structure is competitive the current market.

IBTS, is a 501(c)(3) nonprofit organization who serves as a trusted advisor to local government to offer technical evaluations and support through the Energy Procurement process. For more information on Energy Procurement and other IBTS services please feel free to contact us here.

Christopher Doyle is the Energy Services Manager and lives in Austin, TX.  

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