How To Budget for Your Company’s Energy Usage

As budget season quickly approaches for many businesses across the country, facility managers, CFOs, finance managers, and procurement specialists work to assemble operating cost requirements for the coming year. Whether energy costs are 5% or 80% of your operating expenses, determining what your business’s total cost of electricity and/or natural gas will be next year can be a real challenge, especially if you are dealing with additional complexities like on-site generation or multi-state locations.

Even in a fixed-price contract, forecasting energy spend can be difficult.

Below are some future cost changes that could wreak havoc on your budget.

  1. Capacity cost / Capacity tag increases
    • Charges related to capacity are on the rise for many energy market regions, including ISO New England and PJM (Mid-Atlantic/Western states). Capacity costs now account for upwards of 20% of your total energy spend and can be as high as 30% depending upon your capacity tag or PLC tag assignment. In New England, your capacity tag is a reflection of your Kilowatt demand during the system’s peak hour. In PJM, it’s your demand during the peak hour, however it’s calculated based upon the average over the system’s five peak days.
    • Network Integration Transmission Service (aka NITS) increases in PJM can also affect budgets, and can appear unexpectedly to the untrained eye, yet an industry expert can provide forward guidance to ensure you’re prepared from a budget standpoint.
  2. Utility rate increases
    • Utilities will adjust transmission and distribution charges at times when rate cases are approved at the state level. Identifying these pending and approved rates cases is part of building an accurate budget. Understanding trends at the utility such as decoupling, which can alter T&D charges, is paramount to successful budgeting.
    • With the growth in Distributed Energy Resources (DER) and a changing landscape focused on increasing renewables, utilities will need to adapt their rates in order to fund new state and federal mandates. Programs such as REV NY, which is a transformational program with many goals, one of which is to reduce carbon emissions, are going to have a dramatic affect on utility rates.
    • Other potential pass-through costs include items such as TOTS, which is a NY transmission project intended to be a contingency for the potential closure of the Indian Point nuclear power plant in New York.
  3. Changes in operations impacting energy consumption
    • Energy contracts will typically include a stated swing or bandwidth variation percentage. This percentage is the amount of electricity or gas you are allowed to consume above or below your expected usage amount. Should your consumption go above or below the allotted swing, incremental market charges or penalty rates can be assessed. Depending on your type of business, the electricity or gas you consume may vary, requiring you to need a higher swing percentage, or even full swing (100%).
  4. Change in Law Clauses and Regulatory Changes
    • Should there be a change in law impacting energy rates, a supplier may have the right to pass through any incremental costs on to you. While the change in law is a consistent feature of the supplier community contracts, we have seen varying degrees of what suppliers constitute as changes in law. Winter Reliability in New England, Capacity Performance in PJM and the creation of the Lower Hudson Valley zone in New York are classic examples of true changes in law that can dramatically affect your budget.
  5. Treatment of Ancillaries
    • Not all suppliers price ancillary costs the same way. This is when an educated energy advisor becomes invaluable. Some suppliers will offer a fixed price, with the caveat that if your Capacity Tag / PLC Tag or Transmission Tag changes, they will change their price to you based on the differential. This essentially puts the risk back on you – despite the fact that your price is ‘fixed’. We identify those suppliers that would structure a contract in this manner and either get the contract language changed to protect you, or advise you of our concern with the contract, and if the price is worth the risk.

At Usource, we work with our clients to create and maintain a budget and ongoing forecast of energy spend to a level of detail that fits their needs. To help get you started, check out our basic energy budget worksheet. For a more comprehensive budget and forecast, contact us today.

energy budgetEnergy Buyingenergy planning

About the author

Tom Dyer

Tom is the Senior Director of Procurement and Analysis for Usource. Tom has extensive experience in energy markets, developing and implementing unique solutions and innovative energy strategies, for some of the nation’s largest energy users across a variety of sectors and geography.

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