EnergyWindow MarketElert ^TM - February 2008

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February Elerts

Natural Gas – Nothing beats the attention-grabbing power of the dramatic run-up in natural gas prices over the last month. And, of course, as goes natural gas, so go electricity prices in most of North America. The 12-month strip rose from $7.93 per mmBTU on January 23 to $9.34 per mmBTU on February 19. The increase has been ascribed by the commentators and “experts” to unusually high storage withdrawals (1603 versus 1357 BCF so far for the season), frigid weather and forecasts for more of the same in many markets, dramatically higher crude oil prices (settling over $100 per barrel for the first time ever on February 19), and even rumors of upward pressure created by hedge fund Saracen Energy’s need to cover large loss positions. A look at the 4-year trend on the chart at the right, however, suggests the possibility that prices are simply reverting to the long-term upward trend line, after a period of movement substantially below it. Some consolation might be the fact that current prices are still well below the 6- to 10- year trend. Furthermore, for those buying well into the future, the fact that years 3, 4, and 5 of the strip have only risen half as much (or less), giving rise to substantial backwardation. Those with a need to buy might want to be poised to act quickly, should a brief dip occur.

Coal Feeds the Fire – Coal prices cooled off throughout 2006 and early 2007, but have been on an upward tear since November of 2007, with near month settle price for Central Appalachian coal moving roughly 100% in the last four months, from the low $40s to well over $80 per ton (http://www.eia.doe.gov/cneaf/coal/page/nymex/nymex_chart.pdf) Coal prices rarely grab media attention the way oil and gas prices

Source: EIA

do, but increases in coal costs have a profound effect on U.S. electricity prices. Worldwide, coal produces approximately 40% of energy needs and domestically, about 50% of electricity generation (more than double that produced by natural gas). In some regulated electricity markets, like Indiana, Kentucky and Ohio, more than 90% of electricity comes from coal. In recent years, coal-heavy states have enjoyed very modest 1-4% electricity price increases. That trend may change rapidly, as many utilities and regulators have added “fuel adjustment” or “cost adjustment” riders, which allow new fuel costs to be passed through on a monthly or quarterly basis, to their rates. Impacts will tend to be most acute for regulated utilities, because coal plants are not at the margin in deregulated territories for most on-peak hours, and even when they are, bid prices tend to be market-based (not cost-based).

New Jersey - Electricity Rates increase 10-17%
An Excerpt from the NJBPU Press Release states: “The prices obtained in this year’s FP auction are higher than those obtained last year, primarily because of increased fuel and capacity costs for the upcoming three-year supply period that were factored into the bidders’ prices. The electricity supplies auctioned this year will replace supplies auctioned in 2005, which were priced significantly lower. The combination of these two factors will result in an increase in overall electric bills, ranging from 10.5 % for a typical residential or small business customer in JCP&L’s service area to 17.3 % for one in Rockland Electric’s service area.” http://www.nj.gov/bpu/newsroom/news/pdf/20080208.pdf

The Case for E-Procurement:
What Defines a Best-In-Class Enterprise?

The means by which many businesses are able to achieve significant savings is to take facility supply needs to the competitive market, asking various suppliers to bid competitively to win the contract. Energy supply is no different in this regard than computers, fleet vehicles, or maintenance, repair and operations supplies. In recent years, e-procurement methods have made shopping competitive markets easier and faster than ever before. As a pioneer in energy supply e-procurement, EnergyWindow has long advocated using technology to integrate energy purchasing with overall supply chain management and reduce the cost, complexity, risk and effort associated with sourcing electricity and natural gas.

Much has been written on the subject of e-procurement, and it is a frequent topic in the trades. Recently, the Aberdeen Group published an excellent paper (E-Procurement: Trials and Triumphs, October, 2007) detailing the rise of the platform from dot-com casualty to what they call a “source of competitive advantage for high performing enterprises.” In the paper, authors and research analysts, Amit Gupta and William Browning III, outline how the most effective organizations integrate e-procurement with business goals and enterprise systems to achieve efficiencies in planning, financial reporting, contract compliance, and processing of transactions, among other things. Abderdeen reports that the 622 companies studied, on average, captured a 35% improvement in spend and cut their transaction cycle time by more than half, using e-procurement. They also boosted their bottom lines by optimizing savings and controlling “maverick spend”. Moreover, they highlight a paradigm shift that EnergyWindow has identified in our own white papers (Energy Rises to C-Level, May, 2007): that procurement has transformed from a simple purchasing exercise to a legitimate strategic business concern that demands senior executive support, a centralized approach, and ongoing performance management.

Energy e-procurement addresses the top pressures driving e-procurement in general. Enterprises surveyed in the Aberdeen Group study cited process efficiency, improved spend visibility, lower transaction costs, increased spend under management, and improved contract compliance as motivating factors. At the same time, adoption of energy e-procurement is consistent with the overall strategies those “Best-In-Class” enterprises embraced: using technology to automate processes, centralizing procurement operations, integrating e-procurement with contract compliance and supply chain functions, conducting spend analysis, and increasing visibility through the use of effective reporting tools. As such, it is an important part of savvy energy procurement policy.

As part of an ongoing effort to support our customers with relevant information and analysis, EnergyWindow suggests Abderdeen’s “E-Procurement: Trials and Triumphs” as recommended reading for anyone seeking to advance or create a best-in-class e-procurement environment in his or her own enterprise. According to the report, Best-In-Class enterprises place, on average, 26% more spend under management than other enterprises. The document is available at Aberdeen or via Enporian, a supply chain management services and technology company.

Quick Buyer's Tip

Having a clear strategy, specific parameters for planned energy procurement action and expected contracts, and standard contracts – all with advanced buy-in from stakeholders and “pre-approval” by members of the hierarchy – can save a lot of time and missed opportunities when energy windows of opportunity open, however briefly. In addition, the accelerated processing time afforded by e-procurement technology can boost efficiency and optimize savings, especially when market conditions change rapidly.

Energy Purchasing Strategies for Retailers

Chain Store Age interviewed EnergyWindow President, Dr. Jack Mason, in its January issue. Dr. Mason discusses why retailers need to put traditional apprehensions aside and consider a shift in strategy if they are to effectively safeguard against market volatility. You can download the complete article, “Energy Management: Purchasing Strategies” from chainstoreage.com by clicking the link on EnergyWindow’s web site or by contacting your EnergyWindow sales representative.

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We'd Like to Help

If you want to know more about how EnergyWindow can provide you with the tools, processes and information you need to navigate and prevail in the complex waters of energy procurement and supply management, call 877-444-0488 or 877-444-0497.

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EnergyWindow MarketElert TM - February 2008