The way companies pay for energy is changing dramatically, thanks to the Internet and utilities deregulation. Some companies report that buying power via online auctions has brought them notable savings. But the biggest benefit may come from smart systems.

Power Play

The energy marketplace is complicated, but companies can find ways to benefit from its perpetual changes. "People expect to get 10 percent off their bills automatically just because of deregulation, but they may only get 1 or 2 percent unless they take action," said Jeff Custer, director of corporate development for DukeSolutions in Charlotte, N.C. To do so, "you really have to understand the market and how to buy options and derivatives," he said. The changing nature of energy markets requires companies to develop a new way of looking at how they manage energy purchases. The following three steps can help.

  1. Decision-making. To effectively manage energy purchases, companies need to decide where decision-making authority should reside. Large companies with multiple facilities tend to centralize decision-making to ensure consistency and take advantage of aggregate purchasing opportunities. Companies should evaluate whether they have the in-house resources necessary to handle energy purchasing or whether they should bring in outside expertise.

  2. Risk management. The next step is to determine how energy procurement is affected by the company’s risk management procedures. "Some companies don’t understand the significant budget risk energy costs represent when prices rise and fall with the market," said Custer. "Are the company’s risk management procedures adequate to address its energy procurement strategy?"

  3. A new perspective. Above all, this new world of energy purchasing requires a new perspective on the role energy plays in company operations. "Energy should not be viewed as simply an expense, but as another raw material or commodity that the company uses to do business," said Custer. "Finance executives need to understand that and begin to use their financial savvy and experience with various financial instruments to purchase the energy commodity and help meet budget targets."

E-commerce, deregulation and changing energy needs have created a new marketplace for energy purchases, bringing savvy buyers opportunities for big savings. Thanks to deregulation; emerging online purchase channels; and the availability of information on energy pricing, consumption and usage, companies have more options — and clout — than ever before. Many are leveraging these changes to achieve smarter energy procurement and management. They are lowering costs by "driving prices down significantly on the commodity and buying systems to increase efficiency," said Harry Quarls, senior vice president with consulting firm Booz-Allen & Hamilton in Dallas. Some companies are even outsourcing the entire value chain — purchasing, equipment and systems maintenance — to get a structured financial plan with a guaranteed price.

But with these opportunities for savings comes risk. "Price is a key variable, but reliability is also a focus in decision-making," Quarls said. Reliability is a crucial issue for companies that are becoming increasingly dependent on energy as they use new technologies to manage their businesses efficiently. No longer are manufacturers the only companies that have to worry about power interruptions damaging equipment and hindering operations. "Although some customers are benefiting from better pricing and service, reliability and credibility of vendors is key because these companies can’t afford a shutdown," said Quarls.

The Deregulation Wild Card

As deregulation takes hold in more and more states, companies are seeing their energy options multiply. "At a base level, deregulation allows companies a new level of choice and the ability to shop around," said Mike Rutkowski, senior manager and director of the utility industry e-business consulting practice at Arthur Andersen Business Consulting in Chicago. "It also forces suppliers to compete with new and better services, like total energy management."

Still, the energy market has a long way to go before companies realize the full promise of deregulation. "At this point, competition is spotty because only about half of the states are deregulated or in the process of opening up markets," said Dwight Allen, communications and utilities director for Deloitte Research in Washington, D.C.

Even in deregulated states, the energy landscape is a patchwork of rules and markets with very different economics. For example, although Pennsylvania is deregulated, real estate company Rubenstein Co. had varied results when purchasing energy for its Philadelphia and Pittsburgh divisions. Some suppliers that were eager to do business in the Philadelphia market did not even respond to a request for proposal (RFP) from the Pittsburgh division.

Companies operating in states that are still regulated can lobby for deregulation and pressure their current utility for a better deal. "Utilities may be open to this because they know they can’t put off competition forever," said Allen. Businesses operating in a deregulated market should use alternative energy suppliers, such as Web-based reverse auctions, in which suppliers bid to fill companies’ energy needs. To get attention in this marketplace, companies must spend at least $5 million a year. "You need an energy point person with some knowledge of the marketplace who can contact utilities about services offered and begin negotiations," said John Stephenson, a principal with Navigant Consulting Inc. in Houston. "Talk to bigger suppliers, centralize your loads as much as possible, and be more educated and demanding."

Direct Savings

Many commercial and industrial energy users are starting to buy energy over the Internet in hopes of obtaining better prices through more competition and lower transaction costs. At the very least, companies with cyclical businesses may be able to structure a deal that evens out payments for easier budgeting.

Parkway Center Office Complex, the Pittsburgh division of the Rubenstein Co., lowered its energy costs significantly by purchasing online. Before trying to buy through an Internet auction, Chuck DiLoreto, the division’s operations director, worked with a brokerage to obtain a 5 percent savings on the division’s $2 million in annual energy costs. Although DiLoreto was skeptical about the credibility of online auctions, he tried one that was run by people in the energy industry who were known to his company. "Within a week, I had a 16-month deal that offered 15 percent savings," he said.

As the number of online auctions increases, such results may become commonplace. A significant amount of energy is already bought and sold online. A study conducted by Forrester Research Inc. in Cambridge, Mass., predicted that online energy sales will grow to $266 billion by 2004. "This is a big movement that has been enabled by deregulation," said Jeff DeWeese, vice chairman of Enermetrix, an online energy auction site in Maynard, Mass. The key for energy sellers is to make customers comfortable with this outlet, he said. Companies’ fears about online energy purchases are not entirely unfounded. Because the marketplace is still evolving, it is changing rapidly. Businesses that rush online to take advantage of cost savings inevitably face dangers. "It is possible that companies will build certain assumptions around e-markets and get involved with particular players only to find six or eight months down the road that someone else has a different or better approach," said Allen. This could leave companies with a substantial software investment or a contract that is not advantageous when the realities of the market shift.

Companies should hedge their bets by not having too many eggs in one basket, Allen said. They should also undertake scenario planning activities that evaluate possible market conditions five to 10 years down the road. The biggest variables in such scenarios are the robustness of the economy, the state of the capital markets and the degree of global warming, all of which could have a serious impact on prices and the structure of the marketplace. "Energy today is relatively cheap, but it could go up sharply over the next five years if we find ourselves in a very different environment," said Allen. Such a price hike could have substantial implications for providers, whether they’re online or not.

Leveraging Information

In addition to reducing energy prices directly via online sales, the Web has the potential to lower costs through the free flow of information. Some utilities are developing online portals to provide customers with data and value-added services. "The Internet is an amazing tool that allows better communication between utilities and customers by enabling utilities to quickly put timely and accurate information into the customers’ hands," said Doug Mitchell, director of energy supply management with DukeSolutions, an energy services company in Charlotte, N.C. For example, a company with 100 sites over a wide area could get a single bill with aggregated information on consumption, said Arthur Andersen’s Rutkowski. In theory at least, buyers can use this data to better manage energy usage and procurement, and to simplify the process of buying energy across multiple states.

"Companies can use the information gathered to save money — and not just on the procurement of the commodity," Rutkowski said. "Buyers need to understand how they use energy and even be ready to change production schedules to secure the lowest prices." Some companies are using energy pricing information to purchase different types of fuel, selecting the most cost-effective source of energy at any given time, said Quarls. Companies can also use consumption and pricing information to aggregate their energy loads as much as possible to obtain better prices in states with provider choice. Even companies operating in regulated states should aggregate their loads to get the attention of their utilities and negotiate better services.

The downside of all this information is that businesses are having trouble making decisions. "You not only have to make sense of that information, but the energy world is so fractured that you also have to make sense of many different market conditions," said Mitchell. "It is very hard for individual companies and locations to make enough sense of information to use it to minimize costs." A growing number of companies are using consultants who can work through time-of-use billing rates to determine the companies’ ideal energy usage approach and to shape utility contracts to their best interest.

A wealth of software and other technologies can also help businesses optimize their energy usage. CarrAmerica, a commercial real estate company in Washington, D.C., is developing a Web platform to better manage, purchase and analyze energy. Once the site is up later this year, the company will consolidate all its energy usage information for its 327 buildings in 15 markets. At each CarrAmerica property, the company has installed devices that feed energy usage data into a common database. This information is then funneled to the appropriate personnel for analysis.

"We will be able to take each building and analyze its data individually, then roll up that data by market and consolidate it regionally or nationally," said Rich Greninger, managing director of operations. "This will put us in a good position to buy and manage energy in an open marketplace" once deregulation becomes more widespread and uniform. Before then, Greninger thinks, this real-time usage information will be valuable in his negotiations with utilities and in the management of energy consumption in CarrAmerica-owned properties. The company expects to reduce its $40 million in annual energy costs by 5 percent next year, and it plans to realize further savings when energy markets become fully deregulated.

What the Future Holds

To operate successfully in this environment, companies should understand the economic proposition of energy purchasing, including transaction costs, while looking for reliability and financial backing from suppliers. "Companies need to manage selection carefully and avoid getting locked into a long-term contract," said Quarls. "Things keep evolving, so companies should always be looking for better options."

Moreover, as competition increases and industry margins shrink, buyers are likely to see many energy providers consolidate or exit the market altogether in a real divergence of winners and losers in the marketplace. "It will take a while for it to occur, but when it does, there are going to be economies of scale as never seen before," predicted Quarls, who thinks the industry will be dominated by a group of eight to 10 national suppliers with a few superregional and niche players once consolidation is complete.

Advancing technology is likely to make it much easier for companies to rely on measurement devices that rapidly disseminate data about energy usage. These devices will provide users with a wealth of information about all of a company’s systems at periodic intervals, and energy marketers or purchasing intermediaries will be able to analyze this data to match usage needs with energy available in the marketplace. Usage measurement devices will also be able to inform the market of the company’s load when the company solicits bids and tell equipment to throttle back if prices are too high. "The upshot is a more efficient system," said Allen.