Demystifying Multifamily Energy Procurement
A lot has happened to the energy management market in the last 20 years. A few decades ago, pricing was steady, except for when utility companies filed for an increase because they didn’t achieve a desired rate of return over time. As they frequently went to the well, the game began to change. State legislators enacted legislation to deregulate the industry and to introduce competition that forced better pricing. Today, several states offer competitive energy procurement options.
Because not all markets are equal, deregulation, despite its intended benefits, has presented a complex energy buying process for residential and commercial customers.
Various factors, from weather to changing regulations to customer demand and supply, now dictate pricing from one region to the next. Some can be forecasted, but others cannot. Weather is a predominant driver of energy costs, and the threat of a Blue Norther or heat wave can have an adverse effect on the cost of a kilowatt hour or therm. Each geographic region has its own characteristics, market rules and environmental regulations.
Multifamily not always on a level playing field
Energy is very much a commodity that is bought, traded and sold on the big boards and subject to pricing volatility. Energy markets work like stock markets and change every minute, energy specialists say. Energy procurement requires specific knowledge..
Multifamily isn’t always on level ground with commercial businesses and residential neighborhoods.
“There are challenges in the energy buying process,” RealPage Vice President, Energy Management, Dimitris Kapsis says. “It’s very complex. It’s a very active market and always changing. There is volatility in the markets, especially in New England where there are capacity issues.”
Compounded with market nuances that determine rates, establishing a favorable energy procurement process can be hindered by not understanding contract language or industry jargon. And not every one of a myriad of brokers selling electricity and natural gas has the experience to navigate multifamily properties to the best rate and contract, Kapsis says.
“There are many people who have some type of experience in the market, but are not full-time brokers,” he says. “A lot of people don’t have extensive energy procurement experience nor analytic tools, especially those with no multifamily background.”
Investing in a knowledgeable energy procurement provider
Kapsis and RealPage Director of Energy Management Bob Ricobene recently offered an overview of how to develop a buying strategy. Both work with RealPage Energy Procurement clients to help develop a holistic buying strategy with minimized risk that includes an analysis of current energy rates and identifies best-fit suppliers for markets and properties.
The key to navigating the energy marketplace’s twists and turns, they say, is to have an energy partner who is knowledgeable about multifamily and has access to multiple energy suppliers in every market.
Ricobene, who has more than 30 years of energy expertise and leadership, says multifamily operators are unique to the energy market because they can recover some of the costs from residents. However, they still need to work with a provider who has not only a big-picture view of the market but one at the granular level. That requires developing a buying strategy with a pricing model that reflects the operational goals of the property or portfolio
“You need someone who has knowledge of local markets and access to reputable and vetted suppliers, and ultimately can take energy procurement and integrate it into your budgeting process, your accounting process and any kind of energy efficiency process that you may want to put in,” he says.
Employing the right energy strategy
Most properties base a buying strategy on saving money with the lowest rate, but evaluating risk tolerance is essential and individual to each portfolio, Kapsis says. Operators must decide whether they want to ride the market or provide stability to their budgets.
Either way, a good energy procurement partner monitors market pulse and provides support. The right partner employs a buying strategy and energy procurement process that includes:
Performing an Analysis of the Current Energy Contract – Know where you stand. Suppliers offer some options such as “blend-and-extend” if the end of the contract is in sight. “Get a disposition list,” Kapsis says. “If you’re disposing of property in the next few months, you don’t want to get into a lengthy contract for that property.”
Identifying Best-Fit Suppliers and Vetting Short List – Look for best suppliers to include in bidding. Vet multiple suppliers and choose several that are most competitive and reliable in a particular location at that particular time. Says Ricobene, “the whole goal for procurement is to create competition for your business. You want multiple suppliers competing for your business. You need somebody who is on top of marketplace and knows the suppliers and knows where they are at when you need them.”
Acting Fast on the Bidding and Contract Process – Everything speeds up here. Because of market volatility, pricing can change from one day to the next. The bids should be evaluated and a contract drawn and executed quickly to ensure the best pricing. Some markets are so volatile that you can’t wait more than a day,” Kapsis says.
Transitioning to the Right Supplier – When the contract is in place, the broker should assist with transitioning to a new supplier.
Monitoring the Contract for Renewal – The contract should be monitored throughout the term and property apprised of any conditions or regulatory changes that can affect the renewal. Don’t wait until the last minute, Kapsis says.
Energy procurement and monitoring is more important than ever
Because the energy marketplace has changed over the past two decades, a strategic approach to procuring and monitor pricing is now important than ever. Multifamily operators can’t rely on old practices to provide the best service and pricing to residents or a portfolio.
“The job of the broker is not over when they provide the contract and get it signed, then come back to you a month before renewal,” Kapsis says.
To learn more on how to take advantage of potential cost savings and risk management opportunities in deregulated energy markets throughout the United States, see “Demystifying Energy Procurement.”