Businesses nationwide are feeling the pinch as energy prices continue to rise. As the price of energy increases, so does the cost of production, transportation, and commodities necessary to keep hotels up and running. The need to cut expenses and maximize each dollar is more important than ever.
For many hotel property managers facing rising energy bills, energy costs have come to the forefront as a major budgeting issue. The current energy market makes large bills unavoidable to a degree, but what many facility managers don’t know is the volatility of the energy market is a huge factor in determining prices each billing cycle.
Market volatility is driven by two factors. First, the energy market is irregular. Sometimes it moves in tandem with crude oil prices, sometimes natural gas, and sometimes neither. Prices sometimes fluctuate with the weather, spiking in the winter and dropping in the summer, and sometimes do the opposite. Plus, energy prices have high elasticity, driven by the necessity of the good and consumer fears that the supply will run out.
This puts hotel managers on a financial rollercoaster, with no way to accurately predict the next shift in energy prices, or adequately plan their budget. For hotel chains and other multi-site businesses in the deregulated states of Connecticut, Illinois, Texas, Maryland, Massachusetts and New York, these risks have traditionally caused them to favor long-term utility contracts over short-term agreements. In a deregulated market you can shop around for the best price for electricity. In a regulated market, you have no choice but to purchase from the utility.
Short-Term Purchasing Upside
Purchasing energy in the short term—on a daily or hourly schedule—typically enables hotels to pay less. Studies by Cadence Network show that in deregulated states, purchasing power hourly can save facilities up to 40 percent on their electricity bills.
Buying energy in the short term makes businesses more vulnerable to risk as prices swing across the spectrum. Managing this type of plan requires a high level of monitoring and analysis that is challenging for businesses to do on their own. Fortunately, energy management firms are well-equipped with the skills and tools to develop a purchasing plan that makes the most sense for clients’ goals. These firms have the in-depth knowledge of the energy markets needed for daily plan management, and know how to best minimize energy expenses.
The process begins by gathering a hotel’s utility and site data, as well as energy consumption and expenditures. In essence, the energy manager takes the “energy fingerprint” of the site they’ll be managing. For organization, storage, and accessibility, the site’s information is compiled into an electronic database.
Before developing an energy purchasing plan, energy managers get a feel for the unique situation at each site from three perspectives:
• Research. Rate analysts study the data to determine the current level of volatility and identify the default rates, or “do nothing” rates for each site which is what the hotel will pay if they continue with their current approach without taking energy management measures.
• Planning. Energy managers work with the site’s financial decision makers to understand their budget, revenue, and expense projections to reveal how to allocate funds for utilities, and what the budget can bear in the short and long term.
• Goals. Managers and clients discuss goals for an energy management program, and how they prefer to manage risk. Some clients want to maximize predictability, others are strictly concerned with cost savings. Most fall somewhere in between, with a goal of mitigating risk, improving budget certainty, and keeping utility costs down.
The energy management team then uses market expertise and analytical tools to develop an energy purchasing strategy that reduces spending, meets utility budget expectations, and increases predictability—all aligned line with the client’s goals.
Once they secure the lowest possible rate, managers continuously monitor the energy market for their client. They analyze its progression, determine price projections, and decide when, how, and where to purchase electricity.
Treating energy purchase strategies as a risk management issue is the most effective way to maximize your dollar in a volatile market. Opening your utility budget to managed risk, while protecting it with close monitoring is guaranteed to cause an increase in your bottom line.
Joe Falci is Director of Rate Analysis and Energy Procurement Consulting for Cadence Network, a leading utility, lease, and telecom expense management firm in Cincinnati. He can be reached at JFalci@CadenceNetwork.com.
