Amongst all the economic data we’ve been bombarded with during the coronavirus (COVID-19) crisis, there’s a data point that stands out due to its seemingly impossible mathematics: oil prices have gone negative. For a brief moment, oil producers were literally paying businesses in the supply chain to take their product. While it looks like this may end up being a one-off event, it crystallizes the enormous challenges the whole energy sector has been dealing with due to dramatic cuts in demand and the impact this has had on pricing.
But while it may seem odd to be talking about energy pricing at a time when the nonprofit sector is facing existential challenges, this represents an opportunity for organizations to make significant cost savings. And if you’re an organization managing a large facility, such as public hospitals or universities, then you could stand to make substantial savings at a time when you may need this the most.
However, while energy prices are currently at or near historic lows, the window of opportunity for nonprofits to take advantage of this may be closing quicker than anticipated.
Supply is slowly adjusting to the new demand
Energy extraction and production has a long tail. It can take months to scale down oil and gas extraction and for this reduction to filter through the supply chain. Before the COVID-19 crisis even began, the energy market was already dealing with low demand coming into 2020, due to a record-breaking warm winter. Then once the global lockdown came into full effect, energy demand collapsed at many multiples quicker than the ability of supply to adjust.
This resultant mismatch between demand and supply is why energy prices are currently so low.
However, supply is now slowly adjusting, through both concerted political action from oil-producing countries and through plans enacted over the last few months finally making their way through supply chains. Meanwhile, the demand for energy looks set to increase as lockdown restrictions are loosened around the world.
As a result of these factors, we could be about to experience the reverse in action: increasing demand for energy while supply will lag behind due to the long-tail nature of making changes to extraction and production. As Brandon Fong, Principal of Constellation NewEnergy, Inc. stated in the webinar, “How the COVID Crisis is Affecting Nonprofits’ Energy buying Decisions,” this could very well result in energy price hikes over the medium term. And the early data backs up this forecast, with oil and gas prices already rising slowly.
How nonprofits can lock in savings now
As discussed above, revisiting and renegotiating your energy supply contract could help you lock in substantial savings.
So, how does your nonprofit go about renegotiating your energy supply contact? There are several ways to go about procuring your energy, but a competitive procurement will ensure a competitive price. These are your options:
- Contact suppliers yourself, and ask for price quotes. To be able to compare prices from different suppliers, they must all provide a price on the same day for the same set of accounts. This can be challenging to truly get an apples-to-apples comparison.
- Conduct a Request for Proposals (RFP) to select a supplier. This can be costly and take extensive time. It requires energy expertise and a strong legal team, and negotiations with suppliers can often get difficult.
- Hire a broker or consultant. Brokers and consultants can conduct a procurement for you. It’s important to understand that brokers’ fees are added to your price on a per-unit basis, and they get paid for the entire length of your energy supply contract.
- Involve consortiums or buying groups. Consortiums bring the leverage of their entire membership behind your contract. The Massachusetts Inspector General released an advisory on energy services and suggested that the consortium buying model could offer lower prices. The strength of the consortium can also lead to stronger customer protections in the supply contracts.
Depending on your organization, there may be procurement rules to follow. It’s important to follow whatever rules or guidelines there are.
Using strength in numbers with other local nonprofits
You can significantly boost your negotiating power by banding together with other nonprofit organizations. Unless you’re a large nonprofit with a large campus, it can be difficult going into negotiations alone as you simply have less purchasing power.
As a result, nonprofits are increasingly banding together to negotiate lower energy prices–with the help of a local energy buying consortium. These are usually member-based groups that are open to all interested nonprofits in a particular city, county, or state. These consortiums can often also manage the specific procurement requirements that you may need to fulfill.
How to choose the right energy contract for your nonprofit
These vary state-by-state, but generally, most nonprofits will have the option to choose one of the following energy contract options:
- Fixed price contracts: This gives you a fixed price per kilowatt-hour for a designated term, which provides budget certainty.
- Indexed pricing: This gives you a price based on a market index, determined by the energy market settlement. This can make it difficult to plan and budget because the price is always moving with the market.
- Layered pricing: Percentages of your load are locked into a price at different points in time. It’s similar to a 401K plan in that you don’t buy all of your investments, or energy, at one time.
They all have their pros and cons, and unfortunately, there’s no set formula on how to choose the best option for your nonprofit. But if you want to both lock in savings now and have a fixed cost line in your budget, a fixed price contract could be the best option.
While the future is uncertain, the time to act is now
These unprecedented times have resulted in unprecedented energy prices. However, many signs indicate that we’re heading for an upturn in prices. Global economies gradually reopening their doors, the increasing demand for energy and the limitations put on oil and natural gas production all signal that these savings may not be around much longer.
Therefore, this is an ideal time for nonprofits to look at their existing energy supply contracts and lock into these potential savings while they still last.
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