Best and Worst Times to Sign an Energy Contract
Energy procurement is an ongoing cycle. It is critical that you procure energy at the right time so that you avoid paying for energy at premium rates. Like everything in the supply and demand model, there are best and worst times to enter into negotiations. If your job requirement is that you become the energy broker for your company, then take a deep breath and relax as we are about to make your job a little easier.
When Are the Best Times to Lock in a Price
The “best” price is subjective. In fact, the best pricing is dependent on several factors. Those include:
- The price you’re currently paying for energy.
- What your business goals are.
- How the current state of the market will impact your business goals — you can’t always time the market to lock in the lowest price.
The best time to lock in a price is when you don’t need energy. Like everything in a supply and demand model, the best time is when demand is low. In some industries, those needs are predictable. During sometimes of the year, there is more energy available. The best time to lock in a price for energy is when there is too much energy available, and when there is not enough need for the energy that companies produce. That is not a constant, as energy prices are a fluctuation of both supply and demand. Understanding how the little things impact both supply and demand is one of the benefits of working with an experienced energy broker.
Your first goal is to understand what your baselines are. How much is your company currently paying for energy? How much energy will your company need for current projects and future goals? When does your current energy contract end?
Step 1:
Set a baseline with the current rate you’re paying. Your goal is to evaluate current costs so that you can try to get a lower price than the rate you’re currently paying – look at 12-month intervals, but look at 6-month term – and odd month terms like 21 months – especially if there is more winter or summer
Step 2:
Focus on primary goals. What are your current goals?
- To obtain lower costs,
- To develop a sustainable energy budget, and
- To understand how green energy consumption for your company needs to be.
Answering these questions helps you to identify baseline needs and the backbone of a process that allows you to evaluate energy needs efficiently and effectively both in the short and long term.
When Are the Worst Times to Lock in a Price?
The worst time to lock in energy prices is during peak consumption and when supplies are low. Those are always the most expensive times of year. However, there are factors that impact the situation more such as when your contract is ending, when you are scrambling to procure energy for the next phase of your business. Also, the price of energy is not constant throughout the day. Never lock in a price during the most expensive time of day. Do so when the price is at its lowest. That might be early morning, or after hours.
Identify pricing pitfalls by avoiding situations where:
- You have no options – never wait until the last minute to procure energy. If you are up against an expiring contract and passive about finding more, the cost of available energy will be exuberant.
- You have a default rate in a market that becomes deregulated. In this case, the cost of energy could and likely does, rise. A default rate is the standard energy rate that a utility applies to your company in a market that undergoes deregulation.Think about the California rolling blackouts and the deregulation of that market. Energy costs in that situation rose dramatically. Another example is the state of Texas where you might find yourself in a variable month-to-month rate which is driven by supply and demand. Chances are your rate will rise sharply.
- You are in the worst time of year. For most of the country, those times are summer and winter which cause demand to shoot upwards because of the extremes in weather.
- The term is too short. Never buy 1-month terms as the rate you pay can be high for the entire month.
- You are approaching a weekend or holiday. The reason is that there are fewer people, so there is less liquidity in the market. This causes small orders to have a big impact on pricing. With fewer people selling and buying, pricing is skewed. Thursdays are volatile when the gas storage report comes out – could be great (gas prices are low) or bad (gas prices are high). This makes Thursdays a gamble.
How Your Broker Guides You to Make the Best Timing Decision
An experienced broker can monitor all the changing elements and factors using their advanced technology. Their access to knowledge and understanding of it is a huge benefit to you as they share recommendations with you in a timely manner. Other benefits include:
- Monitoring all price components that make up electricity or natural gas prices daily.
- They take the time to look at different terms and products and figure out the true costs specific to your company, not the industry. They do so by comparing apples to apples, giving you the visual that shows the price components for ERCOT and PJM.
- Knowing your company’s energy needs so that information is specific to you and your company rather than to the market or your industry. An experienced broker asks a lot of questions about your business so that they help you obtain the best product while mitigating the risk and exposure you face within the market.
- Looking at timing and product more than lowering the supplier’s margin; a rate is $.04353, and the margin is $.005, and the energy cost per kWh is $.04303 / kWh. You gain better pricing by understanding the timing impacts to energy than you do when you focus only on the margin.
- A proactive approach to energy procurement. You never wait till last minute. Instead, an experienced broker helps you solve your energy procurement needs well in advance of when you need that energy.