Knowing the characteristics of your energy demand is crucial in the procurement process. Negotiating a better deal requires an understanding of your demand profile, current and future energy requirements, the impact of rules and regulations and how you will manage risk.
Why demand profiles are important
The price you pay for energy is influenced by when and how you access the network.
The energy that end users require from the system is called demand or load. Demand profiles are an important determinant of both short-term wholesale prices and longer-term network prices. When overall demand is high or capacity is constrained, the underlying wholesale price of energy can be very high. Peaky demand requires more responsive and expensive generation to be brought online. It also requires network service providers to construct more network capacity, in parts of the network that are likely to become heavily loaded.
Retailers use the demand characteristics of end users to plan their purchases from wholesale markets. Typically, retailers will charge end users more if they have a more volatile or less predictable demand profile. This compensates them for risks such as users requiring significant volumes of energy at peak times and requiring different levels of energy than forecast. It is possible to reduce your costs through agreeing to a certain demand profile and then ensuring that your business complies with this profile.
Demand profiles are also used by network service providers to configure your connection to their network and determine which network tariff is most appropriate for each site. The maximum demand, or peak load, for end users drives the cost of supply incurred by your network service provider, particularly where the peak load occurs at the same time as other users connected to the same part of the network. End users are typically charged at a rate that is directly related to their maximum demand, levied in $/kW or $/kVA. End users may also be charged a penalty if they exceed the maximum demand agreed to in their contract — their contract maximum demand.
You can’t manage what you don’t measure
Understanding your demand profile is essential to managing demand cost effectively. This requires detailed data from your retailer and analysis of how energy is used within your key processes and equipment.
You need to be able to forecast, with reasonable accuracy, your maximum consumption in any single day (for gas) and in any single half-hourly period (for electricity).
Being armed with detailed usage data helps to negotiate the best possible deal from energy retailers, energy management service providers, or other intermediaries. Usage data will also help identify what opportunities exist to gain benefits from demand-side response.
Retailers are able to provide you with your usage data or demand profile, but you need to request it. Ideally this should be for a minimum of a year but may be confined to Winter or Summer periods dependent upon the load profile. Alternately you can engage the services of a registered Meter Service Provider who is authorised to read your meter and provide the data to your retailer. These providers can also give you access to much more data that the retailer requires for billing purposes.
It is essential that you engage with representatives at the significant energy using sites within your organisation, to develop a better understanding of current and future requirements. Energy assessments can also provide a detailed understanding of how energy is used within your site, key energy using processes and pieces of equipment. This knowledge is critical when making decisions on how to manage your demand profile, and the effect it may have on production outputs or service quality.
In analysing this data, some companies look at optimising maximum demand settings. This involves modelling the previous year’s load and looking for a demand setting for the following year that achieves the lowest cost. This means setting a maximum demand that may incur penalties on a number of occasions but ensures the total cost is lower than setting a demand which meets the highest peak load.
Ways to save
Different options to lower your costs could include:
- reducing demand charges by changing the levels or mix of business activities which flattens your demand profile and reduces your peak demand
- reducing the volatility in your load, enabling you to negotiate a lower premium for managing wholesale price volatility
- shifting energy consumption so a greater percentage takes place during off-peak rather than peak periods, enabling you to negotiate a lower energy price
- improving energy efficiency through the investment in new equipment, changing production processes or introducing more energy efficient practices which reduces your overall consumption.
- understanding future needs (i.e. plans for expansion) and considering if it is better to enter a one-year energy contract and revisit negotiations when you have a clearer picture of future requirements.
Understand the rules and regulations governing energy markets in your jurisdiction and their implications for your business
Energy markets vary across states and territories. It is important to be aware of the differences, because they can affect procurement decisions.
Despite the interconnection between the electricity networks in the states within the National Electricity Market, each jurisdiction has different price levels, price volatility, and load profiles, and it is useful to understand the relevant drivers when considering future contracts.
Prices of network services and network incentives for demand-side response also vary by jurisdiction. Network prices depend on factors such as the cost of investing in and operating the network in different regions and also on the way the regulatory regime is applied.
Industry case study – Amcor – Avoid contracting on a national basis
Amcor has an energy supply agreement with a single energy retailer in each state, selected separately based on periodic tendering undertaken by the company.
The company is not convinced any one retailer can provide the most competitive prices in all states. Retailers have different hedge positions with generators or their own generation portfolio. As the major energy retailers are not active in Tasmania and Western Australia, end users with a national coverage also need to procure energy on a state-by-state basis.
Another example of how different arrangements between jurisdictions can impact end users differently, is how distribution capacity is treated in the Victorian Wholesale Gas Market. In the Victorian market, there are separate arrangements for the energy commodity and capacity, whereas in other gas markets the retailer manages both on behalf of end users. In the Victorian market, the Authorised Maximum Daily Quantity is the limit agreed between large end users and their distribution network operator. Authorised Maximum Daily Quantity can differ from the maximum demand level that end users have with their supplier, for which they pay a capacity charge.
End users can use more gas than their Authorised Maximum Daily Quantity. However, if this consumption is during periods of high demand, the end user can face a charge to cover the cost of injecting additional gas into the system, which can be significant. Some end users are not aware of these arrangements, that they have a significant price risk exposure, or that there are options for mitigating this risk by increasing their Authorised Maximum Daily Quantity.
Decide how to best manage risk
Not all companies have the same objectives for energy procurement. Some businesses may be more interested in cost minimisation, while others may seek price certainty. Often, these objectives can conflict and may require trade-offs.
The most significant areas of risk are price risk and, depending on the nature of your operations and their susceptibility to power outages, supply risk.
Given the relatively high levels of supply reliability that the market rules require, supply risk is generally only significant to end users with continuous processing plant or business critical computer systems.
By comparison, price risk, particularly for electricity and to a lesser extent gas transport capacity, is a major risk that impacts on all energy users.
End users typically manage price risk by contracting with energy retailers who manage the risk as a key part of their retail services.
Volatile prices in the market can also create opportunities for businesses that can shed load without disrupting their operations. It is possible to:
- contract directly with a wholesale market participant and shed load when prices rise above a certain pre-determined level
- include load shedding in your retail contract
- contract separately with a demand-side aggregator who may call on you to shed load and share the revenue earned.
- provide risk management products to retailers and other parties using combinations of financial instruments.
These options are discussed in more detail in the Demand Side Response section.
An option for managing supply risk includes investing in onsite generation facilities.
Onsite generation facilities could also be used to offer demand side response services to your retailer, a demand-side aggregator, or your local network service provider.
Some end users have arrangements with their distribution network operator to switch to using their own generation facilities when the distribution network is approaching full capacity. The load on the network falls and network reliability improves.
One challenge with this approach is that it can impact on how volatile and predictable the end user’s demand profile is, which has implications for the premium on wholesale electricity charges that the retailer levies.