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The low cost of crude oil has suppressed natural gas and electricity prices. Energy is unusually cheap — right now. So, from a purchasing perspective, nothing to see or do here, right?
Not true. The actual energy used to power a facility or any type of operation accounts for less than 50 percent of a utility bill. The other half of the pie, known as non-commodity charges, continues to increase. Check out this breakdown of an average invoice showing the real cost of energy and where potential savings exist.
Reduce Energy Commodity Costs
Nearly 50% of the typical utility bill — come from the amount of energy actually used. They vary daily, depending on the supply/demand balance, economic data, underlying fuel markets and weather. Despite historically low rates, companies can still trim these fees 2-6% with a strategic energy sourcing and procurement program.
Why they matter
- Dramatic fluctuations from $18 to $120/barrel have influenced volatility in commodity prices.
- Nearly 25% of energy budget variances are due to utility rate changes.
How to reduce costs
- Understand your exposure. Surprisingly, many companies have only a limited understanding of their energy volatility risk because they simply treat it like any other category of purchasing and buy on a periodic basis, such as every six months or every quarter. “That misses the strategic dimension. Only assuming you’re getting the best price and waiting another three or six months to buy your energy puts you in a place where you’ve lost ground,” Sanders says.
- Identify key stakeholders. Energy buying is a gray area that can straddle a number of different departments and offices: CEOs, CFOs, IT and operations, to name a few. So who’s really in charge? Knowing the answer means department heads must step out of their respective silos and talk to each other. “What occurs most often is there are different attitudes across different offices and there is no consensus about what risk looks like,” Sanders says.
- Track energy use. This may sound basic, but organizations often don’t have the infrastructure in place to properly track their energy use. This makes it difficult to analyze performance — and find savings.
- Develop a policy and strategy for buying energy. Many companies are simply reacting to changes in energy costs. But today’s fast-changing markets demand a more strategic approach. “Even if you think your decision is good, without a policy in place, you’re just reacting to the market without a sense of direction,” says Ron Taglieri, Vice President of Sourcing for Energy & Sustainability Services at Schneider Electric.
Energy commodity costs are just one of several core components of a utility bill. Knowing each element in detail is the key to maximum savings. Check out for a quick snapshot of the average invoice.
Click here for more information on building a strategic sourcing program.
