The Hidden Pitfalls of Natural Gas Cost Savings
I’ll let you in on a secret: Saving on natural gas under the current market conditions is relatively straightforward. Thanks to a precipitous (and ongoing) decline in US natural gas prices (top chart) and a parallel decline-rebound-decline in Europe (middle and bottom charts) over the last 12 months, most suppliers can easily offer buyers year-over-year savings right now. That’s welcome news for companies that depend on natural gas for their energy needs and for electric power consumers in markets where generators rely on natural gas for feedstock.
Here’s another secret: Favorable market conditions also produce pitfalls. Over the past 25 years, we’ve seen two emerge as the most common. Fortunately, with a little skepticism and a lot of market intelligence, both are avoidable.
Pitfall 1: Acting too Quickly
Buying cheap natural gas is as easy as falling out of a boat and hitting water right now. The problem is, those waters are infested with sharks. Seemingly attractive offers are abundant and suppliers are circling. We’ve seen plenty of initial supplier offers well above market prices. And yet we still see some buyers in such a hurry to book the savings, they lock in rates without first assessing the competitive landscape.
I recently sat in on a presentation to a representative of a large industrial firm that had realized six-figure, year-over-year savings thanks to a fortuitous contract expiration and renewal. The firm’s stakeholders were all pleased — leadership, operations, the procurement team, and even accounting. During the meeting, one of our sourcing analysts really got his attention when he said very matter-of-factly, “Sometimes savings can be your enemy.” The gentleman’s expression said it all: “How can saving this much money be a negative?” Our sourcing expert diplomatically explained how his procurement team had agreed to the new contract too quickly leaving nearly an additional six figures in savings on the table.
This example illustrates the importance of healthy skepticism regardless of market conditions. This kind of dispassionate approach always includes a competitive RFP when opportunities arise so an energy buyer has a frame of reference to compare offers. Depending on the savings potential, it may also be wise to engage a trustworthy, third-party procurement advisor.
Pitfall 2: Waiting too Long to Act
Skepticism is an important attribute, but too much often clouds the judgment of even the most seasoned energy buyer. History proves markets always rebound. And yet, the euphoria of a falling market can create too much skepticism and cause buyers to ignore critical market signals. Under the false assumption prices will continue to fall, they simply wait too long to act.
For a recent example, simply revisit the NBP or TTF charts above. Note that July 2014 was a great time to lock in natural gas rates after a five-month freefall. By October, however, the ship had sailed, once again proving it’s unwise to risk dollars — or pounds, yen or euros for that matter — to capture cents.
Internal pressure can sometimes play a key role in buyers failing to act. Some face organizational expectations (or even mandates!) to deliver contract-over-contract savings. Those working under these pressures often find themselves trying to wait out an unfavorable market to capture some savings. Each time the market moves upward, the hill becomes steeper.
To avoid either pitfall described above, consider these three recommendations:
- Prioritize cost avoidance and cost savings equally as part of your procurement strategy (even though cost avoidance may be harder to justify and quantify).
- Make sure your organization’s procurement strategy and risk management approach are fully aligned.
- Thoroughly review market conditions and pricing prior to taking a fixed price position. If you don’t have the expertise to handle this internally, look to a trusted energy management partner. It’s certainly worth your effort in today’s market.
Natural gas markets are still low today, but it’s important to remember trends in either direction are temporary. Invariably, volatility returns and prices rebound. Why not take this opportunity to implement or refine best practices around your natural gas procurement strategy? Now is just the right time to act to avoid these pitfalls in the future.
Steve Wilhite is the senior vice president of energy and sustainability services for Schneider Electric. Steve joined Schneider Electric in 2011 through its acquisition of Summit Energy where he had been CEO and president since 2001. Prior to joining Summit, he provided consulting services to several Fortune 500 companies that compete in the deregulated retail energy industry. He holds a bachelor’s degree in mathematics from Wheaton College and a master’s degree from Duke University’s Fuqua School of Business. The whitepaper, Understanding Energy Supplier Sales Tactics, is available for download on the Schneider Electric website.
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