To say hospitals are energy intensive would be an understatement. Thousands of doctors, patients and visitors can occupy a hospital during the course of a normal day. Not only must hospitals utilize advanced systems for heating, cooling and airflow within their walls; those systems consume large amounts of energy in order to operate effectively 24 hours a day. There are many other activities such as computer use, medical lab testing and sterilization, as well as food services, refrigeration and laundry facilities that can compound energy use. Rising commodity costs and market volatility can quickly affect the cost of energy used to run any hospital.
A solid strategy for purchasing electricity can help control costs and mitigate the risks associated with energy purchases. As we’ve seen in recent years, price swings driven by extreme temperatures can wreak havoc on budgets that aren’t structured properly. Although your facility might already have an energy management plan in place, it’s important to understand the core options that are available when selecting an electricity procurement contract.
Unlike natural gas, which can be stored in anticipation of an increase in demand, electricity has to be made and delivered in real time, which can make pricing highly volatile. This trend is especially noticeable during the summer when increased A/C demand is straining the grid, causing generators to work at full capacity. This shift in available electric supply versus demand causes prices to increase in real time.
Another factor contributing to electric price volatility (especially in the northeast) is extreme cold. Yes, there might be a greater need for electricity during a cold spell brought on by space heating demand, but the true driver of electricity pricing during the winter is the underlying cost of fuel such as natural gas or in some cases, oil, that powers electric generating plants. As more and more fuel must be diverted to heat homes and businesses during sustained periods of cold weather, the cost of fuel increases. And, with a higher cost of raw materials (fuel), comes at a higher cost regarding the electricity being produced and sold to end-users.
Know Your Outcomes
This has been mentioned multiple times, but you have to be aware of your tolerance for market versus budget risk. This means that, if you value price protection, cost control and risk mitigation, you would employ different strategies than if you were more interested in market timing and/or leveraging downward market trends.
Don’t Believe the Hype
Be aware that the lowest fixed price offered today may not be the lowest long-term price, so taking the time to review supply contracts and negotiating the right deal can help you save in the long run. Another factor that can add an unexpected surprise to your budget is what happens after your original contract expires–so always read the fine print. Finally, use the guide below as a resource to help your decision making process.
Here are few different types of electric pricing structures and how they can be applied to your energy strategy:
- Fully Fixed: This product guarantees a price for electricity that will not fluctuate for the duration of the agreement. By utilizing this type of product, customers insulate themselves from risks associated with increasing energy prices, and also improve their ability to manage their budget. There is, however, market risk associated with this product, wherein if natural gas and electricity prices decline over the life of the contract, the customer would pay more than if the contract called for an indexed or variable rate.
- Variable Rate: This product is based solely on spot market prices and not for the faint of heart as the price fluctuates with the market, but there is greater flexibility because there are no usage restrictions or cancellation fees associated with this product. It can also be converted to a fixed rate at any time if the right opportunity arises.
- Block and Index: This is a hybrid product that combines the budget certainty of a fixed rate with the flexibility of a variable price. Simply put, you are purchasing a “block” of energy at a fixed price and letting the remainder float at a market rate. This allows customers to take advantage of budget certainty (particularly during peak usage times) while allowing for opportunities to leverage downward movement in the energy markets. Block and index strategies are typically reserved for high volume users who have access to energy data in real time.
- Fixed Index with Pass-Through: With this option, businesses elect to pay the varying market price for electricity. Since electricity prices vary every hour during the day, this offers the flexibility to adjust usage patterns in order to capitalize on decreases in market pricing.
- “Green” Energy Options: Adding the purchase of renewable energy credits (RECs) to commodity supply will help offset energy use with the production of renewable energy elsewhere on the grid. Like a fine wine, RECs are classified by production date, type and can be a blend of different sources, such as wind, hydroelectric or biomass.
By using and, more importantly, understanding these strategies, you can improve your ability to better manage your hospital’s energy consumption and budget.
Nate Kessman is a graduate of Johnson and Wales University in Providence, Rhode Island, where he earned a Bachelor’s Degree in Business Management.