When Aggregating is Not the Answer
- Published: July 21, 2020
- Read Time: 2 Minutes
It is common knowledge that the more you buy, the cheaper it is per unit. This is why Costco is so popular and why Group Purchasing Organizations rely on mass customers to negotiate favorable prices and contracts with vendors.
Yet, one factor that facilities rarely assess is the benefits of aggregating energy purchases. After all, if our organization has three facilities, we would just aggregate the loads and facilities in the RFP, right? Wrong.
It’s assumed that the more you buy, the more leverage you have to negotiate a lower price, but, that’s not the case with energy. Energy is purchased in the open market alongside other commodities such as corn, gold, aluminum, oil, and steel. Suppliers hedge your load in this same market; so if the market price is $X then they will hedge based on $X. The price for them does not change because you are buying 50,000 MWh vs. 15,000 MWh in the same way the share price of Google does not change if you purchase 5 shares or 1,000. So, aggregating your energy load does not always result in a lower price. In fact, if not managed properly, aggregation can actually hurt your energy profile.
If you are aggregating two facilities, one with a stable load shape and factor and another with a very sporadic and spiky load - the sporadic facility will bring up the overall price for the stable facility. Suppliers have to commit more resources to managing the sporadic load shape, so costs increase. Furthermore, if you are joining a group that is purchasing energy on behalf of, let’s say, 30 facilities, it is likely that some of those facilities have poor load shapes and even worse credit. The good credit facilities with stable load shapes essentially subsidize the increased costs that the suppliers would levy on those “poor performers” of credit and load. If you are a “poor performer” then you can come out ahead, but if not - be careful how you aggregate.
Unless your organization buys a large amount of energy for a single location or all your facilities are located within the same utility territory, there is rarely ever a price advantage solely based on size. Therefore, an organization shouldn’t focus so much aggregation, but instead on how that energy is utilized. For example, a medium-sized facility that uses energy very consistently throughout the day and has strong credit is likely to receive a better price and more favorable contract terms than a large system of facilities that use energy sporadically with poor credit.
Of course, there are a few exceptions. If a supplier is breaking into a new territory and is focused on market share, they may be willing to sell energy at cost or perhaps even take a loss to capture a large load. Though Ecom-Energy can help you identify these opportunities, they are few and far between. The better strategy is to aggregate facilities with stable loads and good credit and purchase separately for those with sporadic loads and less than ideal financials.
For more information on energy aggregation and to determine whether or not it’s right for your organization, shoot us an email.
About Ryan De La Cruz, REP, CEP, CMVP
As Director of Business Development, Ryan is responsible for the expansion of Ecom-Energy’s products and services. He focuses on driving market and industry insight by utilizing Ecom-Energy’s technical expertise in market trends, forecasts, and analyses.