More Effective Procurement

Generating revenue through electricity contracts

The U.S. retail and wholesale establishments make up one of the largest sectors of electricity consumption in the nation. And they’re likely to use even more within the next few years, according to the U.S. Energy Information Administration, whose recent annual report indicates that commercial and industrial entities will lead domestic growth in primary energy usage through 2040.

With consumption — and costs — on the rise for many chain store locations, building an effective energy management strategy today will play a critical role in maintaining productivity and profitability in the future. But is there a way for large retail sector electricity consumers to go beyond traditional procurement approaches to reduce expenses and consumption, while generating an entirely new revenue stream?

Good news. There is. And it’s a win-win for the retail store industry and the energy sector alike.

Through a unique approach that leverages load management strategies, retailers can earn profits while decreasing demands on the electric grid, reducing prices and consumption, and saving on charges that are typically passed from the utility to the supplier to the consumer.

Let’s start with the most appealing part of the equation — generating profits. Changes in electric utility regulation have empowered retailers in many markets to purchase their power from suppliers other than the traditional utility. Chain stores now have a wider range of products to choose from and more opportunities to tailor energy contracts to meet unique operating requirements.

Many retailers have responded by selecting product structures with a fixed price for all or part of the electricity spend. These structures are appealing because they add some certainty to the overall monthly cost. But that certainty comes at a price.

To enhance pricing and supply flexibility, consumers could benefit from the revenue-generating potential of load management programs.

The premise is simple: Utilities in most markets throughout the United States need consumers to cut back, especially in times of high electricity demand, in order to maintain grid reliability. As a result, various products are available that actually pay consumers to reduce their electricity consumption during such times.

Retailers specifically can benefit by:

1. Selling capacity, which is typically referred to as demand response, where consumers commit to reducing their load at times chosen by the grid operator, typically for a matter of hours during emergency conditions. The compensation earned for providing this service is generally fixed months or even years in advance.

2. Selling energy, where consumers reduce their consumption at times of its own choosing. Through these transactions, a certain amount of energy is sold at a predetermined price during a defined hour or block of hours. If the market price is at least as high as the price specified by the consumer, the offer is accepted and the consumer is paid the market price for providing the promised amount of electricity.

3. Selling synchronized reserves, where the consumer provides energy by curtailing consumption for a brief period on a relatively short notice by the grid operator.

Aside from generating revenues, retailers that participate in these programs benefit by avoiding spikes in wholesale electricity prices and by reducing risk premiums.

Another cost-savings opportunity retailers can leverage through load management strategies is by reducing certain charges known as “pass-through costs,” which originate with the utility or the system operator and are passed to the supplier and then to the customer. These price components vary from region to region and typically include the grid operator’s cost to ensure capacity, transmission and distribution infrastructure maintenance and upgrades, and ratepayer-supported energy-efficiency and renewable energy programs.

The key to reducing these charges is to understand exactly how they are calculated, which varies by market. For example, a charge may be based on the customer’s demand during certain peak hours on the regional power grid or during certain peak hours on the local utility’s distribution grid. By working with your retail electricity provider to understand exactly how these charges are set, retailers can use the load management strategies to reduce those costs or prevent increases.

Retailers that participate in load management programs benefit not only by generating revenue, but by avoiding spikes in wholesale electricity prices and by reducing risk premiums.

Victor Wulc is the sustainability marketing director for GDF Suez Energy Resources, one of the country’s largest competitive retail electricity providers to commercial, industrial and institutional customers.

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