Supply side management
Managing how your organization purchases its energy resources is Supply Side Management. For an energy management strategy to be completely effective in an era of highly volatile energy prices, procurement strategies need to be examined closely. For example, the U.S. Army Corps of Engineers has developed a multi-state Super Energy Savings Performance Contract (ESPC) that captures supply-side savings and applies them to traditional demand-side programs. At Ft. Bragg, for example, the strategy delivered 150 billion BTU in energy savings by helping:
- reduce costs and manage risk in purchasing energy;
- optimize delivery efficiency of the energy through central and distributed heating and cooling plants;
- select energy source and switch fuels in real time to reduce costs and minimize emissions;
- implement a web-based information system to monitor and manage all facets of the energy operations; and
- coordinate all privatization and out-sourcing activities to maintain the efficiencies of an integrated operation.
You may want to use the guidelines below to develop a plan that best fits your business.
Step One: Define your energy purchasing objectives
As with any plan, it is important to establish written purchasing objectives, as discussed in step three of goal setting for demand-side energy management. Some relevant business questions to ask at this stage are:
What do we buy?
When do we buy?
How do we buy?
Who do we buy from?
How much do we buy?
What is my cost being measured against?
Answering these questions will help you craft a plan that will effectively address your energy needs.
Step Two: Create your plan
With your supply side purchasing objectives set, you can now build an energy pricing plan that will keep you prepared for changes in the market. Your plan should include the following components:
Determination of the risk tolerance level for your business;
Definition of program objectives; and
Creation of a policy and procedure document that:
- identifies what market conditions will trigger your price plan;
- identifies internal controls and execution guidelines exist;
- sets volumetric goals for various price points;
- sets time parameters for purchasing in the event market does not meet price triggers; and
- determines appropriate pricing tools to achieve diversified portfolio.
- Development of a quantifiable hedge strategy; and
- Obtaining senior management approval.
Step Three: Monitor the energy market
Step Four: Execute your plan
Pricing alternatives can help your business achieve a balance between market sensitive price and price stability. According to utility experts, this requires implementing one or a combination of the following.
- Index Pricing The buyer or seller will fix the price at a monthly/daily index based on posted cash price or NYMEX price (www.nymex.com). Currently the commodity used pricing mechanism for many regulated energy providers. It is a viable pricing tool for energy purchases when prices are at extremely high levels or energy sales when prices are at extremely low levels. The rationale behind index pricing is to avoid fixed pricing that results in a loss.
Fixed Pricing A company will fix prices for multiple months or seasons up to several years. Short-term fixed price contracts are attractive when a company wants to lock in prices during volatile price periods such as winter or shoulder months. The price of the contract may be structured so that the cost is the same each year, creating a base price with a yearly escalator. A long-term fixed price contract is attractive when prices are at extremely low levels that are not expected to hold for a long period of time.
Caps Buying a call option that gives the buyer the option of purchasing energy at a predetermined maximum strike level without obligation of buying at that level. The buyer pays a premium similar to an insurance premium.
In an environment of high and variable energy prices, coupled with increasing demands to reduce energy consumption and GHG emissions, it pays to plan ahead. Because effective energy management strategies can directly increase the bottom line net earnings, it also pays to evaluate other forms of energy and their total costs, not just buy the same product year after year.
Sustainability in Action!
Resource Conservation /2009 AMI Environmental Achievement First Place Award Winner. Smithfield Tar Heel replaced its hog singer nozzles from old models to new, highly economical models. This change reduced the plant’s natural gas usage by 25,626 dth per year, equal to more than $250,000 per year.
Hatfield Quality Meats partnered with Pennsylvania State University and Ben Franklin Technology to develop a process to use choice white grease and lard as an alternative boiler fuel. In 2009, Hatfield used one million gallons of anima fat as an alternative to the one million gallons of oil that would have been required. Emissions resulting from the grease use were a fraction of emissions from oil.
Motion Sensors – Sara Lee is converting from traditional building light fixtures to a more energy-efficient system including the use of motion sensors in many locations. Energy savings are projected to be more than 2,500,000 kWh per year, a more than seven percent efficiency increase.
Green Light Bulbs – Hormel Foods replaced light fixtures with more energy efficient fluorescent lighting, which reduced annual CO2 greenhouse gas contributions by 399 tons
Oxygen Trim Controls – Hormel Foods installed oxygen trim controls in order to improve boiler efficiency, which saved $72,000 in lower gas costs, 512 tons in greenhouse gases reduced annually.
Programmable Controllers – Hormel Foods installed these controllers to provide better control over lighting, ventilation and temperature in its barns.
Heat Pipe Coils – Hormel Foods added these coils to the process of a dry room to improve the drying efficiency of the unit, which saved $29,711 per year, 575 tons of CO2 reduced.
Biogas – Smithfield has begun burning biogas to reduce natural gas use. Smithfield has been capturing methane gas produced during wastewater treatment at certain facilities for use as fuel in modified steam boilers. This process helps offset fossil fuel consumption and reduces atmospheric methane emissions, while reusing a waste product. This method has reduced the company’s GHG emissions by 4.5 percent. Seaboard Foods has a similar program that has reduced their natural gas use by one third. Additionally, Seaboard Foods uses pork fat to make biodiesel. Hormel Foods provides animal fat as feedstock to a biodiesel production facility.
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