The Strategic Sourcing of Energy—Part II
Today’s guest blogger is Ted Eichenlaub, a senior consultant in the Energy practice at Greybeard Advisors LLC. Ted brings a wealth of energy experience, from both a corporate and a plant site perspective. He can be reached at: Eichenlaub@GreybeardAdvisors.comIn our last posting, we discussed how strategic sourcing of energy can be used to uncover the multiple components of the delivered unit rate of energy; the commodity rate component was reviewed. In this posting we will focus on the transport rate component.
In simple terms, the total cost of transport reflects (1) the amount of energy transported and (2) the unit transport or transmission rate. “Transport” generally refers to natural gas and oil transport while “transmission” refers to electricity transport. The unit transport rate charged by an interstate carrier or local distribution company reflects the related administrative, operational and maintenance costs of the pipelines, wires or other types of facilities (i.e. trucking, storage, etc.) involved. The right to transport or transmission “capacity” can be owned by the end-user or purchased from other owners. Additionally, the market determines the transport rate’s “value” at any time; it varies with many factors including government regulation, the time of year, week or day, and its “firmness.”
The variance of the rate with various time periods generally reflects the extra end-user demand on the system. This extra demand is usually due to abnormal circumstances such as harsh weather conditions or unplanned system outages. These “peak” period occurrences stress the delivery system capacity, and the transport rate (and the commodity rate) will reflect it. The challenge of the end-user is to have strategies available that help respond to these situations with a favorable outcome (generally beneficial to both supplier and end-user). The end-user can also decide if it is prudent to own transport (FT) or transmission (FTR) to meet its needs and not be subject to market price volatility.
The firmness of transport refers to whether or not it is guaranteed to happen; and a premium is paid for that guarantee. A primary way to optimize transportation cost then is to evaluate how much of the end-user’s usage is absolutely required (firm) and how much is not (variable), and then assure that the transport rate reflects those requirements.
Most end-users do not have a level-loaded consumption pattern over the hours of the day, let alone the week or month, but the maximum as well as the absolute minimum required volumes for operational stability can be identified. Determining the absolute minimum (or “firm”) amount energy that an end-user requires to meet minimum operation stability can lead to a transport or transmission cost saving opportunity. For natural gas, the time period is generally by the day, while for electricity it is generally by specific hour(s) or perhaps fractional hourly time period. Once identified, the end-user that operates in a deregulated market area has the option to purchase firm transport separate from non-firm (interruptible) volumes.
The interruptible component of volume can be transported as variable (or interruptible) volume through a matching interruptible transport service. While this volume is not guaranteed for delivery, it offers the benefit of no Take or Pay charges. The result is no fixed cost for the variable service when it is not required (i.e. weekends, holidays, plant shutdowns, inter-day non-use periods or other similar situations).
Strategic Sourcing works within the evaluation process to achieve best value for the end-user while also benefiting the provider. It requires a review of requirements via a team made up of all of the affected groups, both operational and non-operational. The primary tools used are well thought-out Requests for Information (RFIs), Requests for Proposals (RFPs), reverse auctions and an appropriately informed review of their results. These tools allow the end-user to receive bids in a competitive environment from suppliers and marketers vying for the end-user’s business. The proposals may also offer other components of a full supply service that may be of interest and benefit to the end-user. It is important therefore, for the energy end-user to be aware of the multiple components of all services and costs, and decide in what form to use or own them so that best value can be extracted from all of them.
