Monday, January 21, 2008

Energy Costs: It’s All About Prices …Isn’t It?

If energy gets too expensive, look for a lower price, right? In states with deregulated utility markets—that is, where people have a choice of suppliers—this is exactly what many consumers do. And this is what they should do. But is this enough?

For reference, a number of entries to this blog discuss the opportunities to save money by reducing energy waste. Just a few of those entries include:

Energy Savings: See What You’re Missing!

What CAN you save? What WILL you save?

How Waste Raises the “Price” of Energy

The point is, if you want to reduce your energy costs, price is only a partial solution. Even the most hard-nosed procurement officers eventually come to grips with this fact. Consider the elements that determine price of natural gas purchased in a NYMEX strip (10,000 MMBtu):

(Click on image to enlarge)

About seventy-five percent of the cost is for the commodity itself, a cost that is market-driven. That’s what the supplier pays for it. Add on 15 percent for transportation (or basis), which covers the cost of getting the gas from its point of production to its point of use. Certain fees are statutory and therefore non-negotiable. Finally, that leaves the supplier’s profit margin. If you wanted, you could beat up the supplier over that. But what do you get for your troubles? Something like five percent of five percent.

There’s a lot more savings to be achieved by reducing the volume you need to buy. On average, large energy consumers can find 10 to 15 volumetric savings opportunities. The links offered above are a starting point.



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