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How to Reduce Costs With 'Energy As Financial Planning' Approach

The diversity of options for securing energy and power available to an industrial energy manager today are vast and expanding.

The complexity of these options is matched only by the evolving, opaque billing structures pushed by energy generation, transmission, and distribution companies. This article offers a simple rubric for evaluating industrial energy supply and outlines a critical exercise for assessing the short- and long-term health of industrial energy supply.

Having spoken to thousands of energy users across five continents, dozens of countries and countless utility footprints, I observe two key forces defining energy portfolio management today: first, the dazzling array of billing structures employed by utilities to eke out every penny they can; and second, the innovative approach taken by energy managers to eke in return. The back and forth between these two forces has borne demand for products and strategies that address the key needs of energy managers — namely lower cost and lower risk. These needs can be further delineated: lower cost means not only lower electricity rates, but lower penalty charges, lower CapEx and OpEx for energy strategies and products, and less time requires from the team for monitoring and maintenance.

Lower risk, too, has many facets: risk can be risk of supply interruptions, risk of price increases, risk of regulatory change, etc. Across geographies, the strategy that has been most useful in helping energy managers weigh costs and risks has been the Energy as Financial Planning approach. Put simply, this approach encourages energy managers to consider their energy portfolio — all the sources of energy their plant uses, along with other strategies for risk reduction — as they would their personal investment portfolio. Much in the way an investor seeks a mix of stocks and bonds to optimize risk and return, so should an energy manager consider a balance of energy sources and strategies to optimize energy portfolio performance.

How does this work? An energy manager should first list all their “energy investments” — that is, strategies and supply including long- and short-term grid contracts, wholesale market purchases, liquid fuel generation, on-site alternative energy generation, battery backup, demand reduction capacitors, energy efficiency initiatives, etc. Next, the energy manager should identify the risk and economic value (the “return”) of each energy investment as high, medium, or low.

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The complexity of these options is matched only by the evolving, opaque billing structures pushed by energy generation, transmission, and distribution companies. This article offers a simple rubric for evaluating industrial energy supply and outlines a critical exercise for assessing the short- and long-term health of industrial energy supply.

Having spoken to thousands of energy users across five continents, dozens of countries and countless utility footprints, I observe two key forces defining energy portfolio management today: first, the dazzling array of billing structures employed by utilities to eke out every penny they can; and second, the innovative approach taken by energy managers to eke in return. The back and forth between these two forces has borne demand for products and strategies that address the key needs of energy managers — namely lower cost and lower risk. These needs can be further delineated: lower cost means not only lower electricity rates, but lower penalty charges, lower CapEx and OpEx for energy strategies and products, and less time requires from the team for monitoring and maintenance.

Lower risk, too, has many facets: risk can be risk of supply interruptions, risk of price increases, risk of regulatory change, etc. Across geographies, the strategy that has been most useful in helping energy managers weigh costs and risks has been the Energy as Financial Planning approach. Put simply, this approach encourages energy managers to consider their energy portfolio — all the sources of energy their plant uses, along with other strategies for risk reduction — as they would their personal investment portfolio. Much in the way an investor seeks a mix of stocks and bonds to optimize risk and return, so should an energy manager consider a balance of energy sources and strategies to optimize energy portfolio performance.

How does this work? An energy manager should first list all their “energy investments” — that is, strategies and supply including long- and short-term grid contracts, wholesale market purchases, liquid fuel generation, on-site alternative energy generation, battery backup, demand reduction capacitors, energy efficiency initiatives, etc. Next, the energy manager should identify the risk and economic value (the “return”) of each energy investment as high, medium, or low.

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