The Hidden Value in Energy Contracts: Starts with an “Audit”

June 23, 2020

This article originally appeared in Forbes México on June 11. Following the publication of certain agreements as new policies, the energy sector has experienced uncertainty and therefore has caused confusion and resistance among the private sector. However, a thorough analysis points to significant possibilities of optimizations and savings for companies.

Due to COVID-19, the economic crisis has already started negatively impacting many large industrial and commercial companies in Mexico and throughout the world. Some of these were forced to decrease or completely stop their operations, putting at risk the possibility of bearing the cost of their workforce and financial commitments.

The United Nations Conference on Trade and Development (UNCTAD) calculates an impact cost of a trillion dollars, just in 2020. In an interview with Acclaim Energy México, a consulting company focused on advising high energy consuming companies on purchasing strategies, negotiations and strategic management of the commodity, María José Treviño, its Country Manager, exclusively tells us that there are possibilities for optimization in existing energy supply contracts, as a solution to a search to obtain savings at this time.

“Companies rarely look back at their energy budgets, least of all when they already have ongoing energy contracts. The reality is that few companies track these contracts proactively. Typically, there are opportunities for optimization, invoice correction, untapped options within the contract, and commercial mechanisms that may expose them to risks that must be constantly mitigated.” María José details, that by proactively embracing this approach clients have discovered hidden value within the contracts that they have evaluated in self-supply, qualified supply and on-site generation schemes as well as isolated-supply and distributed generation. Some companies have discovered up to 40% savings in electrical energy spend, which can be the equivalent to billions of pesos a year in savings for the country’s large industrial and commercial companies.

In addition to the market movements and the prices of fluctuating variables that must be monitored, she also comments that there are changes in policies and regulations, such as the increase in transmission and distribution rates that the CRE unanimously approved last Thursday for companies in the self-supply scheme. “It is a puzzle of various contractual and commercial elements that we have to manage so that the company, based on its consumption and risk profile, can maximize its savings and constantly mitigate risks. It requires continuous work, an effort that should never stop”, points out María José.

Energy solutions for companies in the face of this 2020 crisis

In addition to optimizing electricity contracts or evaluating options for executing a contract through private companies, there is also the possibility of carrying out the same process with your natural gas contract, through an effort to optimize the cost of the molecule and transport.

The identification of the opportunities that exist, starts from an atypical audit that takes a couple of weeks, carried out by energy experts like Acclaim Energy, where they review some elements such as formulas, consumption data, receipts and terms and conditions, to confirm the technical and commercial areas where there are opportunities for improvement in electricity and natural gas contracts. The key after identification is implementation, an effort that they also carry out.

“It is a matter of structuring a strategy according to the growth plans of each enterprise, or also considering those companies that have been forced to decrease their consumption drastically and that have commitments to purchase energy under” Take-or-Pay “schemes, paying for energy that they will not consume during the ramp-up period to get back to regular activities”. For these cases, she tells us that there could be possibilities to restructure contracts through negotiation, always seeking a win-win, also managing to establish a sensitivity between the parties, since both the generator or supplier and the consumer will want to mitigate the risks to which they are exposed in these difficult times.

This month, the energy sector has experienced uncertainty and therefore has caused confusion and resistance by the private sector. “It is an ongoing process,” says María José, “and it is our job to monitor the market every day to help consumers navigate the opportunities or risks they face, and always evaluate how these changes apply to their ongoing contract(s). The most important thing from a consumer’s perspective is that they have visibility and control of their budget. In the face of so much change, they must take advantage of the opportunities that exist and seek to maintain them through a series of strategic decisions that can be taken along the way.”

Companies in Mexico are constantly looking for solutions to this dilemma. Given the regulatory uncertainty in Mexico, it is worthwhile for large companies to approach experts and try to apply this energy management approach in order to try and save their company from the coming economic blow. Perhaps this solution will save thousands of jobs that are at risk and restore some of the revenue lost to the health crisis.