Commercial, Energy Procurement, Industrial, Power Prices - April 14, 2016 - By Constellation
Make risk your advantage, not your obstacle
Sponsored by Constellation
When someone talks about risk, what does it make you think of? Oftentimes it feels like a threat: Hearing on the news that there’s high risk for flooding in your seaside town. Sometimes risk can be daring or dangerous: the bungee jumper standing at the edge of a bridge seeking a thrill. Whatever you think of when you talk about risk, chances are it’s nothing good.
However, consider this lesson taught in introductory economics classes: Risk doesn’t mean something bad might happen, it means something unknown might happen. In other words, we’re simply not sure what will be the outcome.
When thinking about energy costs, that’s still a cringe-worthy thought. Will the east coast experience more hurricanes this summer, affecting my gas prices? Or will it be cooler than usual, so I don’t have to power as much air conditioning in my store? You might have a higher bill, but you might also have a lower bill.
Regardless of how you purchase power and natural gas, there is going to be some level of risk, but there are methods of purchasing both fuels as part of an encompassing energy portfolio that give you the fluidity to minimize the risk of something bad happening while taking advantage of the opportunity that something good might happen.
Consider asset allocation for a retirement plan: Depending on the risk tolerance level of the investor, there is often a percentage of bonds — generally more stable — and a percentage of stocks — generally more fluid — and they work together to come to a much more predictable and consistent overall investment than might be realized by a single investment purchase alone.
But how is that like buying power and natural gas? They are actually very similar. For example, assume power costs are going up for your New England distribution centers, so you take a conservative approach to power purchasing, treating it like your bonds. You can proactively manage your power supply in a way that helps protect against high volatility. Then assume that natural gas prices are dropping for your mid-Atlantic stores, so you take a more aggressive approach with gas supply, treating it more like an opportunistic stock purchase. You can purchase natural gas through a managed approach to give you flexibility to take advantage of market opportunities. Over time, this begins to create balance across your energy portfolio: Increasing budget predictability and strengthening risk management across both fuels in a way that might not be likely when each is purchased without consideration for the other.
The concern we most often hear is that this approach is too complex or time-consuming for businesses. However, there are strategies that exist that can help reduce exposure to price volatility and allow you to make smaller, more frequent purchases without being burdened by each transaction decision.
For example, supermarket company Giant Eagle worked with Constellation to develop a smart power purchasing strategy with a Flexible Index Solution. It actively manages this strategy with Minimize Volatile Pricing, an algorithmic program in which smaller percentages of load are purchased at regularly scheduled intervals over a longer time horizon, similar to the concept of dollar cost averaging in investing.
By diversifying your energy portfolio like you would an investment portfolio, your business can intelligently use risks to your advantage. Start building your energy purchasing strategy today to confront the risks you might be avoiding. You don’t have to be a bungee jumper to take that dare.
This is the first in a series of columns sponsored by Constellation addressing the interests of Smart Energy Decisions’ readers. At Constellation, our combined team of natural gas and power experts have the tools and expertise to build custom strategies that work for your business, ranging from reporting tools and automated purchasing to hands-on account management. We understand how to pull the right levers to drive towards the results your business needs.
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