The Evolving Energy Landscape Calls for an Evolving Energy Purchasing Strategy

In today’s day and age, one thing is certain: energy markets are uncertain.

While federal initiatives have called for an energy production revolution in the U.S., the growth of data centers and artificial intelligence (AI) is fueling an even greater surge in demand. On the supply side, plant retirements, the growth (and intermittency) of renewables, and electricity and natural gas infrastructure challenges have raised concerns about whether the available supply will be able to keep up with the pace of the growing demand.

Supply and demand uncertainty and shifting market fundamentals can lead to both near-term volatility and price premiums for future terms, as unpredictability is even greater. However, the same factors that drive prices up can also push them down — it just depends on how conditions evolve.

Rather than trying to predict what will happen tomorrow, why not select an energy strategy that gives you the flexibility to be proactive and strategic, as well as quickly react and pivot? A plan that can move with the market, be tailored to your risk tolerance, and help you achieve cost savings.

If you invest, you likely chose a strategy that has a portfolio of options, all of which match a pre-set risk tolerance level: aggressive, conservative, or moderate. This allows you or your financial planner to have just the right mix of risk and reward, so your investments perform at a pace you’re comfortable with.

Similarly, diversifying your energy purchases according to your specific risk tolerance could yield the same type of results you would expect from your investment strategy. In uncertain markets, you want just the right amount of risk exposure to capitalize on rewards such as lower prices, while minimizing higher prices.

In the world of energy purchasing, this may mean shifting your mindset. Instead of thinking: It’s easier to lock everything in today because prices will probably be higher in the future. Consider: I need to think about the future and manage forward, today.

To diversify how you’re purchasing energy, consider a managed approach. It allows for variation in how, what, and when you lock in, so you can pursue lower costs and prepare for however the market may move today and in the future. This approach also syncs seamlessly with complementary energy programs and services that are designed to help you reduce costs or even earn money through targeted energy management.

You may be thinking: But wait, I like the certainty of fixing all of my costs into one rate. I know what my business is going to pay, and I can ensure we stay within budget. And if prices go up later, I’ll be good to go because I’m locked in…

These are valid arguments, but they may not be completely true. It’s important to remember:

• When you lock in the cost components that comprise your electricity or natural gas supply service, the market-based components and costs that fluctuate, including the power and gas itself, come with a premium that covers the risk to hedge these.
• When you bundle all of your cost components into one fixed rate, certain cost changes can still be passed through during your term, which may take away the security of “total predictability.” These changes can be the result of a regulatory action or other scenarios outlined in your supplier’s contract.
• Setting your price and forgetting about it may seem convenient and give you peace of mind until your term is coming to an end. If prices are not what they were when you signed your initial contract, you may have sticker shock. Conversely, if prices go down after you lock in your rate, you may regret having to pay a higher rate.

One of the most notable benefits of a managed approach is its overall flexibility. You can be on offense as near- or long-term market pricing shows favorability, and you can be on defense if regulatory actions or market factors indicate an increase in prices.

A managed approach lets you:

• Tailor your risk exposure for an optimal balance of budget protection and cost benefits.
• Decide how much of your total load you want to lock in or "hedge" now or later, eliminating the need to pick the best day to lock in.
• Choose how to handle the key cost components outside of your commodity price to help lower overall costs. You could end up paying less for certain market-based costs that comprise your energy supply if you choose to pass them through, rather than bundling them into your price.

It’s important to keep in mind that with a managed approach, at some point in time over your contract term, you may end up with 100% of your load hedged with no risk exposure. But, getting there could be much more strategic and cost-effective than locking in your full requirements on one day in time.

A managed approach can also help you lower costs or earn money by seamlessly incorporating programs and services, including Strategic Load Management, energy efficiency, renewable energy, and decarbonization, into your strategy.

Going back to the investment strategy analogy, it’s not uncommon for individuals to manage their own investments using today's digital tools and market data. But many people lack the time and need to lean on their financial advisor.

Likewise, if you are an energy manager who prefers full control, partial involvement, or only wants to be minimally involved, you could benefit from a client strategist. A client strategist from NRG’s Strategic Client Services team can help you with planning, devising, and executing your energy strategy.

• The flexibility and endless customization possibilities of a managed approach help make it a solid choice when the risk of volatility and higher forward prices are imminent, as well as when the market is low or experiencing some dips.
• With the uncertainty that large loads and the demand revolution bring, and the shift in the generation mix from thermal dispatchable resources to intermittent resources like solar and wind, now is the time for a strategy that will provide the flexibility to move with changing market conditions.
• You can go beyond what and how much energy you purchase and take advantage of energy services that consider how, when, and how much you use to help lower costs and position your business for long-term success.
• You may wish to augment your strategy with a team of client strategists who can help develop and execute your purchasing strategy while also providing you with valuable market data and reporting to help you make better decisions and track your performance over time.

Learn more about how your business can benefit from a managed approach today.

On the NRG on Energy podcast, NRG Senior Vice President Scott Hart is delving into some of today’s most pressing supply and demand challenges, such as large load growth and whether current generation capacity can keep up.