By Steve Roberson, Atlas Retail Energy
The deregulated energy industry in Texas creates a myriad of electricity and natural gas supplier and product options, and typically many large commercial consumers of energy will have some exposure to the wholesale market. Often this can benefit users, especially large commercial consumers such as universities and manufacturers. But an organization must be aware of the impact sudden changes in commodities can have on their energy costs, as it happened in last month’s weather event in Texas when prices reach 382 times the normal price of electricity and 131 times the normal price for natural gas.
So what can a business do to mitigate against a major challenge and ensure alignment with its risk tolerance?
One solution is a retail energy advisor. Utilizing a retail energy advisor helps businesses understand the exposure they have and provides them with tools to protect against this extreme market volatility. It also helps these organizations plan for their needs, gather insight and intelligence on future market outlooks, understand potential risk exposure and reward and ensure the appropriate mix of energy sources. Regardless of one’s needs, it is important that they work with an energy market expert to help them understand the market dynamics that match their needs.
The good news that some companies were prepared for a disaster or extreme market volatility, as occurred in Texas earlier this month.
Specifically let’s review three types of organizations in Texas that utilized three different strategies to purchase electricity and weather the storm.
First, some organizations must prioritize predictability above anything else. One of our clients is a hospitality firm that requires consistent electricity budgets so we contracted their energy needs under a fixed price, where their price for electricity will not change throughout the contract term.
On the other hand, we also worked with a manufacturing company that was interested in taking on a significant amount of risk with some protections in order to achieve their goal to pay the lowest price for electricity. To protect them from the most extremes, Atlas monitored the markets and notified them of potential extreme price volatility. This client was fully exposed to wholesale energy markets until Atlas recommended to hedge the remainder of February electricity volumes once weather models forecasted some of the coldest temperatures the region has ever seen.
Finally, the last example is a data center who wanted to protect 50% of their budgets through fixed rates while the other 50% of their budget exposed to wholesale markets to avoid paying premiums during normal market conditions. This enabled them to take a middle ground from the first two examples.
As shown in the below table, all three clients avoided significant costs by utilizing Atlas as their energy advisor. In fact, if these clients were not protected against real time wholesale electricity costs, the total February invoice would have been on average 2.7 times their total annual budget under normal market conditions.
| Organization | Scenario | Annual Usage (kWh) | Average Annual Budget | Feb Cost No Protection | Feb Actual Cost | Avoided Cost |
|---|---|---|---|---|---|---|
| A | Fixed Price | 3,342,943 | $122,552 | $428,127 | $10,213 | $417,914 |
| B | Last Minute Bal Month Feb Hedge | 9,679,210 | $394,883 | $663,909 | $22,500 | $641,410 |
| C | 60% Annual Hedge | 298,379,831 | $12,829,115 | $38,217,575 | $17,965,281 | $20,252,294 |
By understanding a company’s goals and energy needs, an energy advisor can perform a blind RFP on behalf of clients and then verify the legitimacy of the results with wholesale exposure. The supply community acknowledges this wholesale verification process, which allows a reduction in premiums and excess supplier margin.
Of course, not all retail energy providers are created equal, and every company is different. As such, companies should look for an advisor that will lay out all the risks on the frontend so clients aware of their exposure, as well as an advisor that matches them with a solution that best fits their governance rather than always pushing for the lowest cost option–which led to many of the horror stories we are hearing out of Texas.
The energy landscape is constantly shifting; recent events in Texas underscore the importance of aligning your business with a trusted and knowledgeable advisor. It is our belief that each individual client deserves a curated solution to fit their organizational objectives. As future economic conditions remain uncertain and the energy industry continues to evolve, it is paramount for all businesses to strike the necessary balance between cost reduction opportunities while mitigating inevitable upside risk.
As President of Atlas Retail Energy, Steve Roberson leverages more than 12 years of industry experience to ensure future growth for the business. Steve has played key roles within the company since its 2013 inception and has taken on increasing responsibilities year after year, helping facilitate the business’s rapid expansion. He holds a bachelor’s degree in Political Science from the University of New Hampshire and has completed executive leadership courses at Columbia University and Rice University.
