Being an Energy Superhero in Challenging Times: Maximizing Value through Active Retail Portfolio Management
By Susanne Fratzscher, Director Business Development
& David Rissmiller, VP Wholesale & Retail Energy Services
With climate imperatives and corporate ambition growing, alongside other business priorities, energy and sustainability leads have already become key players in reducing their organization’s carbon emissions and transitioning to decarbonized supply. In today’s economic environment, however, where every dollar counts, they must perform an act of ‘double magic’: maximize value and savings that can support their organization and help fund sustainability and other critical initiatives.
Opaque energy markets combined with limited internal bandwidth and resources make it challenging to stay on top of market changes in real time, maintain awareness of the latest renewable energy opportunities, and manage a supply portfolio that consistently delivers ‘magical’ results over time.
For aspiring energy superheroes, CFR is pleased to share some practical tips to uncover real value opportunities and how to access them:
1. Give your retail energy strategy a fresh look
2. Layer in new cost-effective renewable energy (RE) solutions
3. Actively manage an integrated supply portfolio.
As an experienced, mission-driven, and independent energy advisor to leading brands and institutions, our views are drawn from our +16 million MWh of annual load under contract for energy strategy development, procurement, and ongoing portfolio optimization. We have the right track record, team and values to help you see opportunities in new ways and rise to the challenge.
Tip 1: Give a Fresh Look to Your Retail Energy Purchasing Strategy
Retail energy markets are replete with inefficiencies. You can mitigate these to create significant value and capture savings.
Watch out for the following inefficiencies that may find their way into a retail supply portfolio:
- Retail and channel mark-ups
Retail prices have trended downward in recent years as fuel prices and demand have declined, which has allowed retail suppliers and brokers to pass on some savings to customers while actually increasing their margin capture. This kind of behavior is enabled by the lack of transparency in current retail energy markets (the same dynamic applies to natural gas as well as electric markets). A key value point is to ensure all transactions are as transparent as possible so that the purchaser knows exactly what they are being charged and why.
- New retail solutions poorly integrated
New retail solutions are becoming more broadly available and can be integrated into your portfolio in a way that is cost neutral or better. One example is retail-delivered RE products, which have recently been increasing in prevalence but continue to be complex and often opaque as to what risks the customer is taking on. Integrating such new solutions into your energy portfolio requires diligent assessment of the ever-changing market.
- Retail product structure mismatches with organizational goals
Selecting the correct product structure is key to achieve a desired risk and savings profile. For example, your business units may want maximum price stability and be willing to pay a premium for this structure. Still, there are ways to substantially reduce this risk premium, while taking on relatively little additional risk. Reviewing organizational goals frequently with internal decision-makers and identifying retail products that best sync up with these goals can result in significant value. For loads in regulated retail markets, utility tariffs may or may not match with changes in load profiles; tariff reviews could yield significant savings.
- Companywide economies of scale not captured
Decentralized purchasing by individual sites or business units does not capture the economies of scale or purchasing power achievable at a company-wide level. Procuring larger volumes leads to more competitive offers from the suppliers, and lower transaction fees on a unit basis. Negotiating at the corporate level can also lead to more favorable contract terms across all sites/business units and ease the administrative burden. The scale from corporate-wide purchasing can also create leverage to get greener options as part of your supply portfolio.
What to Do:
- Take a fresh look at retail contracts and leverage competitive forces. Running a competitive process and requiring transparent broker fees will keep costs down. Commonly, 2x-4x savings are possible relative to renewal with incumbent brokers/suppliers. A recent competitive process quadrupled our client’s savings as compared to what they would have realized by renewing with their incumbent supplier through a non-competitive process.
- Now is a good time to kick the tires, even for a future-start contract. Although power prices have been rising over the last month or so, they are still near 10-year lows and the forward curve has remained relatively flat. With current market conditions demonstrating low near-term prices relative to historical data lows and a flat forward curve, savings can be captured now regardless of how far in the future your contract expires.
- Adjust to corporate needs and harness portfolio value across the organization. Explore options to aggregate locations across regions, assess if your current retail product structure(s) and purchasing strategy still matches your stakeholders’ needs, and consider re-contracting and integrating new solutions, including renewables. Rethinking your approach to retail energy purchasing and aiming for portfolio value is an important building block on your way to increased savings potential.
Tip 2: Layer in Cost-effective Renewable Energy (RE) Solutions
The renewable energy market is dynamic and changing quickly. Suppliers have responded to growing demand with an array of innovative, simple and more flexible RE products at historically low prices. But while the market is as attractive as ever, a clear path forward on RE procurement can remain elusive even for the most sophisticated buyers due to the lack of comparability of many proposed solutions. Plus, there is a lot at stake when layering renewables into your portfolio.
Keep an eye out for the following RE alternatives beyond market-standard (Virtual) Power Purchase Agreements:
- Retail-delivered Renewables (‘Structured Retail’)
An increasingly popular option to decarbonize loads in deregulated markets are retail-delivered renewables – also called ‘Structured Retail’ deals. Through mid- to long-term contracts, buyers purchase retail-delivered power and project-specific Renewable Energy Credits (RECs) from a new, specific RE project directly from a retail supplier, often without a premium over business-as-usual (BAU). The power is sourced by the retailer from a new RE asset and delivered directly to the buyer’s meters, replacing the buyer’s BAU electricity supply. Key value drivers of retail-delivered RE solutions are: 1) little or no wholesale market volatility depending on how fully fixed the price is, 2) simplified accounting treatment, 3) lower regulatory complexity, 4) price certainty, 5) all while driving a new RE asset that you can point to as the source of your electricity. Several high-profile buyers have already made use of this new RE alternative, including Wells Fargo in Texas, PJM and California.
Yet it would be a mistake to view these solutions as straightforward products, although it is often pitched as such by suppliers. Each supplier has structured their Structured Retail solution in a unique way, with differing flexibilities and allocation of risks, making an apples-to-apples comparison complex. Given their novelty they have not yet coalesced around buyer-friendly terms, creating more contracting risk than if implementing more market-standard solutions. CFR has served several Fortune 500 companies on retail-delivered RE transactions, noting significant variance on pricing and critical contract terms.
- Next-Generation Utility Green Tariffs
Until recently cost-attractive RE options were limited in regulated markets. Market demand, engagement with utilities, and innovation have driven increased optionality. Most of the ‘next-generation’ green tariff programs enable customers to purchase power (and RECs) directly from their utility at fixed rate in return for a fixed or floating bill credit (typically tied to the utility’s avoided cost of generation). The cost is intended to reflect the actual cost of generation and delivering renewables, which allows the utility to avoid creating a cost burden on non-subscribing rate classes. These green tariffs have evolved from premium-priced, in-region REC purchases to more flexible market-driven programs.
Green tariffs offer key benefits relative to (V)PPA solutions, including near-site environmental impact, greater budget certainty through bill credits that are correlated with other costs on the electricity bills, and lower volatility of bill credits from avoided cost rates as compared to wholesale market rates. Still, green tariffs range in complexity and economic attractiveness, and are unlikely to be amended after regulatory approval, so it is key to pre-emptively assess program viability – from economics to contracting implications – and to the extent possible, shape the utility’s thinking on key areas of impact for you. CFR is extensively engaging with utilities to both innovate and implement these solutions on behalf of clients. Upon program availability, it is critical to assess regulatory filings, vet and source customer-supplied assets, develop economic views, identify project and programmatic risks, negotiate governing agreements to minimize exposure to identified risk areas, and ultimately liaise with utilities to fulfil your objectives.
- Behind-the-meter Onsite Solar and Battery Storage
Few RE solutions offer a stronger visible demonstration of an organization’s commitment to emissions reduction than an onsite solar array. Having a RE asset located at your facility not only generates clean power, but also local interest and positive recognition. In certain markets, behind-the-meter solar can be a great way to reduce electricity bills and protect against future rate volatility, too. Increasingly, battery storage is being paired with these behind-the-meter systems to provide additional cost savings and other benefits like resiliency. From an economic standpoint, the success of an onsite project depends on several factors specific to the facility in question – availability of state and local incentives, physical make-up and constraints at the site, and the cost for traditional electricity at that location. With the cost for solar continuing to decline and more states rolling out innovative programs to encourage project development, now is a great time to assess or reassess what onsite options may be available.
What to Do:
- Re-profile your baseline and organizational goals. To fully understand the value of RE solutions relative to your current purchases, it is critical to analyze current electricity usage and spend, both over time and across your portfolio of purchases by locations. Specifically, you will want to consider opaque on-bill charges, complex local, state, regional and national regulatory dynamics, as well as the inherent volatility in energy pricing and factors that influence it.
- Assess all available RE options and their business case. Inventory all available renewables options given your energy footprint and size. Assess contract dynamics, risks, optionality around term length, technology, geography, counterparty, terms and conditions, as well as environmental, social and strategic impact considerations, to understand the full business case. Evaluate behind-the-meter opportunities across the country to prioritize locales where an onsite project can make good financial sense.
- Develop a risk-diversified RE portfolio. Combine renewables solutions that fit with internal stakeholder preferences into a risk-diversified portfolio that optimizes for diverse risk/return profiles. Examine how one or more RE transactions could impact your existing energy portfolio – and how outcomes could vary by solution – to determine ways that project selection and/or risk management mechanisms (offered by developers and/or sourced through third parties) can enhance the risk/reward profile of the portfolio.
- Procure competitively where possible and influence (regulated) markets. Due to market opaqueness, product differences, and the fact that cheap power purchase prices do not necessarily result in the highest value, it is critical to leverage competitive forces when procuring large-scale RE. In addition, making your ‘voice of the customer’ heard in the industry and expressing your organization’s financial and decarbonization needs, specifically to utilities and regulators in markets without retail choice, may improve your outcome significantly.
Tip 3: Actively Manage Your Energy Portfolio
Is “1 + 1 = 3” a magic trick? No: active energy portfolio management results in more than the sum of its pieces. Monitoring and managing the performance of all your retail and RE purchases, and – where possible – integrating them actively, will yield greater portfolio value.
What to Do:
- Monitor and manage RE performance over time. RE contracts typically extend over multi-year terms where regulatory, market and counterparty changes can occur. Hence, it is critical to keep an eye on your project(s)’s performance. In particular, it is necessary to verify that commercial and contractual terms of the transaction are fulfilled, RECs are properly tracked and managed to substantiate your RE claims, and the financial and operational performance of the RE project(s) is optimized.
- Actively manage retail energy cost and performance over time. Many organizations have historically treated energy as an incurred cost, believing that there is neither much opportunity to reduce cost nor much reason to actively manage it like other operating expenses. Energy should, however, be re-evaluated and managed actively because market, regulatory, consumption and portfolio mixes can change substantially over time. Without ongoing focus, cost savings can be missed, and risks will multiply.
- Actively integrate retail and renewable energy strategies. When organizations procure RE, it is often acquired and managed independently from the other energy contracts in the corporate portfolio. By treating RE contracts in a silo rather than managing them as part of the portfolio, organizations leave a significant amount of money on the table and compound total risks to energy spend. At a simplistic level, as RE is contracted, the remaining grid power and natural gas purchases need to be adjusted over time. In addition, commercial terms can be negotiated to allow for flexibility in both renewable and conventional energy contracts. Finally, properly structuring contracts for both renewable and conventional energy can allow you to align procurements and capture natural hedging opportunities, further reducing costs and risks over time.
How to Get Started
Ready to give your retail energy strategy a fresh look and open to considering changes to your current approach and decarbonize your supply? CFR can help you determine whether this is worth your while. We can conduct an initial evaluation of your situation and options, including:
- Meet with you and your team
- Analyze data to characterize your usage & spend distribution and your purchasing strategies
- Identify and quantify potential savings opportunities in your retail portfolio
- Develop an overview of your RE options and their specific business case for your company
- Review our findings with you and discuss how you can take an integrated portfolio to the next level.
Please contact us (info∂customerfirstrenewables.com) if we can support you on your energy superhero journey!
About the Authors:
Susanne Fratzscher is Director, Business Development and advises on Canadian and international RE markets and GHG accounting. Susanne has 18 years of leadership experience including at the World Wildlife Fund, where she helped leading global companies develop RE sourcing strategies, and as Managing Director of the Canadian German Chamber of Industry and Commerce in Montreal where she consulted with corporations on international business development strategies in renewables and clean tech.
David Rissmiller is Vice President, Wholesale & Retail Energy Services who brings extensive experience across retail and wholesale energy companies, including in P&L management, wholesale energy financial and operational analysis, and transaction valuation. Most recently, he was the business unit CFO for Just Energy’s C&I business, where he also evaluated M&A opportunities. Prior, David led NRG’s finance team responsible for the Gulf Coast wholesale business.