Fixing costs in a fluctuating market
Aerospace Manufacturer Soars into Savings with Summit Energy’s Pricing Strategies
By recommending an integrated energy procurement and energy risk management strategy, Summit Energy guided a global aerospace manufacturer to year-over-year savings of more than $5 million.
Price Option Analysis Valuable in a Fluctuating Market: Savvy procurement professionals know that when it comes to buying energy, choosing a fixed-price contract is not always the most cost-effective option. Among other options, Heat Rate products give energy buyers the choice of linking their power price to the price of natural gas. However, with highly volatile natural gas prices and fluctuating electricity demand patterns, companies that take advantage of Heat Rate products must have a disciplined risk management strategy in place. Without it, Heat Rate products can prove more costly than beneficial.
SITUATION
The volatile Texas power market provides energy users with a wide array of pricing options. However, many companies do not know which option best fits their energy needs. A global aerospace manufacturer operating a large site in Texas that uses 40 megawatts of power, wanted a pricing option that would complement its risk strategy. The company turned to its energy partner, Summit Energy, for guidance.
LEADERSHIP
Prior to locking prices, Summit led the aerospace manufacturer through the process of determining its risk appetite, concluding that the company would generally take a moderate position in balancing its risk strategy. Summit used this position as a guideline for how to best manage pricing volatility.
Despite the fact that Heat Rate prices were at historic lows, Summit recommended that the manufacturer wait to fix its pricing position and advised “floating the market” in the meantime. Why? Summit’s forecast showed that NYMEX prices would fall throughout the next two quarters, giving the company the opportunity to lock in at a lower rate as prices continued to fall.
RESULTS
Summit’s market opinion created millions of dollars in savings for the aerospace manufacturer. By following Summit’s advice and not immediately fixing its position, the manufacturer was able to take advantage of three separate opportunities to lock gas prices as they fell. Each opportunity lowered the cost of electricity supply from 7 cents/kWh to 5 cents/kWh, resulting in approximately $1.8 million in savings per lock. The total year-over-year savings Summit created for the aerospace manufacturer was more than $5 million for just the one Texas facility.
