Originally published as part of The Outlook Newsletter
Vol. 1, Issue 2C
When energy prices and volatility heat up, many businesses tend naturally to fixate on market dynamics and those factors that analysts point to as driving them.
Will high inflation persist? How would escalation of the Russia-Ukraine conflict impact global energy supply? Will production outpace exports? What impact will this have on prices?
These are complex questions with real implications for a company's energy spend. But CFOs, operations managers, and others tasked with managing energy spend across fuels, natural gas, and electricity don't need a crystal ball into the markets to make a meaningful impact on the bottom line.
In fact, there are some practical opportunities "hidden" in the details of physical energy contracts, invoices, and data that can be pursued to preempt or offset some of the effects of volatile energy prices.
Energy sourcing: a strategic approach
Natural gas markets deregulated in the early eighties, with electricity markets following in the late 90s. Currently, the natural gas markets are deregulated in all fifty states with electric markets in about twenty states. Deregulation provides businesses an opportunity to choose between multiple service providers and negotiate rates. StoneX facilitates this process by helping customers develop competitive requests for quotes (RFQs) that increase price transparency, lower costs, and ensure fair terms and conditions. Most often ignored during the sourcing process is contract language governing force majeure events, incremental pricing, and counterparty creditworthiness that can have substantial impacts on operations and spend & particularly amidst volatile market conditions. StoneX's proprietary pricing systems, our in-depth knowledge of regional markets, and our ability to negotiate favorable contract terms provide our clients an advantage over their competitors.
Importance of accurate invoice review
It may sound simplistic, but it is imperative that companies verify invoices to ensure rates and contract terms are being applied correctly. We are constantly surprised by the number of inaccuracies on utility invoices. Errors can include incorrect rate application, subpar payment terms (leading to habitual late fees), misapplication of taxes, and a host of other line items that can amount to significant dollars over time. In many cases, these errors go back years & resulting in substantial refunds due to customers.
Data management: optimizing energy spend with KnowRisk™
Information plays a crucial role in today's marketplace, but managing it can often be a challenge. Many organizations use spreadsheets as a tool to manage and analyze data. While adequate, spreadsheets can become cumbersome to use, lack multi-user capability, and remain highly susceptible to human error. To bring efficiency to customers, StoneX developed tracking software, called KnowRisk™, to keep customers abreast of dynamic markets, hedged positions, and impacts to budgets. Designed in-house with a pulse on customer needs, Know-Risk™ is user friendly, customizable (reporting capabilities by plant, division unit, etc.) and offers a unique feature with its ability to capture both physical and financial positions. The result is timely and accurate visibility to tailored metrics which are key to successfully managing a company's energy spend.
In our experience, these measures are most effective when pursued as part of a comprehensive, long-term strategy that considers financial hedges – not as an alternative to one. For managers looking to offset volatile times, these opportunities can provide meaningful bottom-line benefits and budget protection.