On the number 1 cliché in energy procurement

By Benedict De Meulemeester

By Benedict De Meulemeester on 9/03/2018

Topics: Risk management

In the course of the 18 years that I’ve been working in energy consulting, I’ve heard again and again the same clichés or platitudes. A strong one has consistently been:

“The cheapest MWh is the MWh that you don’t consume.”

blog mwhs

As it goes with such clichés, they are always somewhat true and somewhat false. And they are used by people to justify incorrect reasoning.

The cheapest MWh cliché is often used when people want to explain why their effort in energy sourcing is sub-optimal.

Energy management exists of two components

On the one hand you have energy procurement, which determines the price per MWh, on the other hand you have energy efficiency efforts that determine the number of MWh’s that you consume. (There is an in between category of demand side management, the optimization of consumption patterns in relation to energy pricing at different moments.)

energy management

To me, it is quite obvious that good energy management means that you adopt a holistic approach and optimize both the gas and/or electricity procurement and the efficiency efforts (and the demand side management efforts). But then, there are some energy managers that say that energy procurement is not that important, because the cheapest MWh is the one that you don’t consume. This typically comes at the end of a conversation during which we pointed out weaknesses in a (potential) client’s energy buying, but the other side of the table is reluctant to put in motion the changes to improve.

At first sight, the cheapest MWh cliché seems to be correct. If you don’t consume a MWh, that part of our EUR or dollar/MWh x MWh equation becomes 0, so our total cost is also 0. Whereas, however good you buy energy, you’ll never manage to bring the EUR or dollar/MWh component down to 0. Nevertheless, it’s not true. Energy efficiency improvements come in two big categories:

  • Adaptations of behaviour.
  • Investments in more efficient technologies.

So, definitely the second category doesn’t come for free. You can maybe do spectacular reduce your energy consumption, but that doesn’t mean that it comes at a bargain. You need to take into account the investment costs of those MWh’s that you didn’t consume.

Energy efficiency efforts therefore often have the same pattern. In a first phase, the savings might be quite big, but then as time goes by, it becomes ever more expensive to squeeze out another 1% of less energy consumption.

The impact of the energy markets

At the same time, the difference between good energy buying and bad energy buying can make a difference of tens of percentages, in any given year. In Europe in 2017, we saw a sharp increase in the wholesale electricity prices (one of the topics at our Transatlantic Energy Conference) and to a lesser extent in natural gas pricing. In some countries, for some clients, we saw that the difference between buying electricity at the best and buying electricity at the worst moment ran up to 30% on the total price of electricity. Try to make a 30% saving on your electricity consumption! And take into account how much euros or dollars you need to invest to achieve that.

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Moreover, applying the cliché and neglecting the importance of good energy procurement can turn cheap MWh’s thanks to your energy efficiency into expensive MWh’s. You see that again and again. The management is convinced to make investments in energy efficiency with the promise of large savings. And a few years later, that management is screaming in despair: “where is my money” as they see the total cost of energy go up. Well, the percentages reduction in MWh’s consumed were undone by percentages increase in euros or dollars per MWh paid.

So no, the cheapest MWh is not the one that you didn’t consume. It’s the MWh that was well managed in all its facets, with buying energy based on a profound energy procurement strategy and energy efficiency both getting the attention that they deserve.

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