As record-breaking cold grips the nation this winter, commercial property owners should consider a widely available, if underutilized, way to save money. Since the late 1990s, many states have de-regulated energy, opening the door for private suppliers to compete for customers with traditional utilities. Today, electricity and natural gas are de-regulated throughout the Northeast, Mid-Atlantic and Midwest, giving property owners in these regions the opportunity to reduce energy costs by buying energy directly from private suppliers.
Electricity and natural gas are commodities, with prices rising and falling in reaction to market forces. Severe weather events can trigger dramatic spikes in pricing, making it prudent for property owners to negotiate fixed price supply contracts during periods of mild weather when prices tend to stabilize.
When negotiating energy supply contracts, the buyer’s bargaining power is tied to the volume of their energy usage, with the most energy consumptive properties creating the greatest negotiating leverage for their owners. Owners of multiple properties will typically bundle all of their properties into one supply transaction, with the aggregate energy usage among the properties strengthening the owner’s bargaining position.
Energy savings go straight to the bottom line for hospital systems, universities, data centers, manufacturing facilities and other “direct” users who pay energy costs from their own funds. Additionally, owners of office buildings and retail properties (which traditionally pass through energy costs to their tenants) benefit from private energy supply agreements, as sophisticated tenants appreciate – and increasingly come to expect – the reduced energy costs resulting from private supply agreements.
Before entering into private supply contracts, companies often want to know how much money they will save by agreeing to a fixed price supply contract. The answer depends on the movement of the energy markets during the term of the contract – the degree to which market pricing rises above the fixed price of the owner’s contract represents the amount of savings. There is always a chance that real-time market pricing could dip below the contract price, but most sophisticated property owners are willing to live with this risk in exchange for the cost certainty afforded by fixed price supply transactions.
Although each private energy supplier has its own distinct form contract, the most reputable suppliers realize the need to modify their contract to reflect certain negotiated deal terms which are critical to the ongoing business needs of the buyer. In addition to obtaining the lowest available pricing, savvy property owners will often negotiate for various substantive items (such as ensuring their right to sell their buildings during the contract term) and administrative accommodations (including extended payment and billing dispute periods).
Commercial property owners considering private energy should note that the process of negotiating and entering into supply contracts is complicated, particularly without the guidance of an experienced representative.