The Nature of Energy as a Purchased Item - Part Two
November 10, 2010 - SCMR Editorial
In our last posting, we began outlining some of the aspects that make energy unique among purchased items and why a “one set and forget” or “one size fits all” purchasing procedure does not apply. We continue now with other aspects while we keep in mind that the commodity cost of energy is only one part of the total cost of energy to the end-user, something that is addressed through a comprehensive energy management effort.
• Standardized contracts
Energy is purchased using industry-standard contracts. Although they may be slightly customized, the basic terms are rigid. There is little room for negotiation here, just the clarification of terms and expectations. Time should be spent to make a legal review and also assure that specific concerns are addressed.
MW, decatherms, capacity, reservation, generation, LDC, spinning reserve; each energy type has its own language and acronyms that are technical in nature. The purchasing party should be fluent in the linquistics.
• Worldwide sources
Depending on the commodity, it can come from sources that are local, across multi-state lines or overseas. The end-user might be able to buy directly from the source. It can be renewable or non-renewable, result in energy credits or not, can be subject to documentation requirements by the government and arrive to market through traditional or non-traditional methods.
• Transportation and delivery
Each energy type has its own modes of transportation and delivery along with accompanying strict rules. Delivery is a multi-stage, multi-provider process requiring daily scheduling, real-time related balancing and true-ups against ordered quantities. Penalties for non- performance are levied. All of this requires constant daily (at times fractional hour) oversight. There are also intraday, inter-day and before the start of next month scheduling deadlines.
In addition, delivery of product can be curtailed or limited. Loss of delivery can occur at the most inopportune of times thereby requiring backup strategies. This is where the need for collaboration on overall comprehensive strategy between the various responsible parties in the organization starts to become obvious.
Due to its complexity, and unlike most purchased items, energy is subject to stringent government regulation and oversight of transactions and market rules for purchase and delivery. These rules are rigorous, ever-evolving and government enforceable.
Depending on an end-user’s location, energy can be purchased in a bundled or unbundled format. The unbundled format gives strategic sourcing type rigor even more of a chance to uncover opportunities. All of this also emphasizes the “comprehensive” nature of energy cost management and the collaborative effort of multiple disciplines required within the organization. Part of an organization’s task is to figure out who or how this will be handled. Since the actual purchase of energy is the lead action, the Purchasing Dept sometimes leads the effort, but that can vary from one company to the next.
In summary, the purchasing of energy requires extra attention, expertise and strategy to navigate, communicate and work effectively within the purchasing marketplace. Energy is unique among purchased items due to its ever changing regulation and the volatility of the factors that determine its market value. The multidiscipline effort required to manage all of the aspects of energy (in all of its types) emphasizes the need for a comprehensive energy management strategy to control the total cost borne by the company. Its recent acknowledged relationship to global greenhouse concerns will make it even more unique.
Interested to learn more? http://www.greybeardadvisors.com/services/energy_management_services/