CES' Budget Planning & You: A Perfect Match

in February 14th, 2022

By Matt Gamache, Vice President, Analytics & Operations

As we move into mid-February, the Competitive Energy Services’ Analytics Team is coming to the end of a busy budgeting season. Often around the turn of the year, we are assisting many clients with finalizing upcoming fiscal year budgets, and for clients that have calendar year budgets, we are completing year-end wrap-ups to review variances and discuss trends. With each budgeting season comes new challenges and while CES analysts customize and tailor each budget to our clients' needs, we rely on the same fundamental approach for all of our budgets. This budgeting process and resulting data set provides us with a crucial foundation that informs a variety of other energy initiatives and opportunities. In the following post, we wanted to provide a window into that process and the ways in which it underlies so much of the energy analysis work that we do.

CES has been providing annual energy budgets for clients since the very early days of the Analytical Team. It is often one of the first projects new analysts will work on, as it requires a look at nearly all aspects of our energy work. Whenever we are getting up to speed with a new client, we will often begin with an energy budget, in order to make sure we have a complete picture of the way an organization uses and pays for its energy. For this reason, it is often the cornerstone of many of our full-service client relationships and it is a product in which we take a lot of pride.

The CES Budget Process

We begin each CES budget by compiling historical energy consumption data for every utility account in a client’s portfolio. Often, we collect this data directly from utilities, as we do with much of our procurement work. In other cases, we rely on invoices or client reports and records. We will typically begin with a multi-year average of this historical consumption to establish a baseline for the upcoming fiscal year. By using multiple years of history, we can remove the influence of annual weather patterns. Once we have a consumption baseline, we will incorporate any and all known projects that might cause the upcoming year’s profile to differ from historical averages. This includes considering behind-the-meter generation, expected changes in occupancy, production levels, and upcoming efficiency projects. The COVID-19 pandemic has created an especially tricky situation to navigate, given the significant shifts in operations and future uncertainty. This process most often requires in-depth collaboration with client stakeholders and facility managers, in order to ensure we align our budget with their expectations.

Once we have a consumption profile built, we then apply the relevant delivery tariffs and supply charges. Budgeting consumption profiles at the individual account level allows us to be as accurate as possible in applying specific rate designs and charge types based on the appropriate utility delivery rate codes. Beyond taking the current effective charges, we will escalate or modify specific rate components based on any proposed rate cases or recent trends. After delivery tariffs are set up, we develop supply cost projections based on existing supply agreements for each commodity. Depending on a clients’ hedged positions at the time when we budget, we will rely on current market forwards and/or recent pricing quotes to forecast open market positions. These supply projections will also incorporate any anticipated cost increases related to policy or regulatory changes. Altogether, this provides us with an outlook on monthly and annual rates for each account and commodity.

Finally, we will incorporate any other related energy projects or purchases so that our clients have a complete financial picture for the upcoming year. For many clients, this means including estimated REC and carbon offset sales or purchases. In other cases, it includes incorporating utility credit purchase agreements or long-term renewable power purchase agreements. Most recently we find ourselves estimating the financial impact of battery storage installations or demand response participation. As clients take advantage of new products and programs in the future, CES will be prepared to not only assist with those initiatives but also make sure they are accurately accounted for in future energy budgets.

The final budget is delivered with all of the detail and support that goes into this process, so that our clients have all of the relevant information at their fingertips. The first page of any budget will be a set of notes and assumptions to describe what went into each aspect of the budget, for both consumption and rates. The final budget numbers will group accounts based on client preferences, showing monthly projected consumption, delivery charges, supply charges, and totals costs for each commodity. CES budget documents will also include year-over-year comparisons, with the same level of detail. This report is a great tool in understanding the key drivers behind costs and changes anticipated in the upcoming fiscal year. By walking through this document, CES Analysts and Energy Services Advisors can help clients to understand their full energy portfolio and where various cost components are trending.

Often in reviewing early iterations of the budget process, clients will offer feedback regarding expectations for the coming year, or areas where they would prefer to be more or less conservative in the assumptions. CES expects that budgets will need to respond to our clients’ unique circumstance, and we sometimes issue multiple drafts of the budget as expectations change. By making the process collaborative, the final budget numbers are ones that are well understood by both CES and our clients. This makes for a stronger product and one that all stakeholders feel comfortable working with in the future.

Building Off the Budget

Establishing a comprehensive energy budget provides CES and our clients with an invaluable tool for all subsequent energy initiatives. The budget creates a foundation that future energy initiatives can be built on. Tracking actual costs and conducting comparison analysis can lead to insights and adjustments to financial forecasts. The budget consumption and cost profile at an individual account level serves as a baseline for future procurement strategies and project impact analysis. The in-depth understanding of our clients’ energy systems that results from the creation of a detailed budget, allows the CES team to be proactive in identifying opportunities and nimble in reacting to an ever-changing market and regulatory landscape.

The majority of CES' full-service clients subscribe to CES’ Variance Tracker service. This provides clients with monthly or quarterly reporting to compare actual consumption and costs versus their energy budget. CES Variance Tracking looks at consumption, costs, and rates to show our clients exactly where their monthly costs have differed from budget expectations. As we have seen especially in recent years, consumption patterns can differ from historical trends for a variety of reasons. Sometimes these differences can lead to investigations into facility performance, flagging areas for operational changes or future efficiency projects. In other cases, rate variances will spur detailed audits to identify billing problems or highlight the impact of a utility rate change. Perhaps most of all, as trends develop throughout the course of a fiscal year, CES works with clients to understand these variances and set expectations for the remainder of the fiscal year. This allows clients to update their budget offices and react to variances as they appear, instead of retrospectively at the close of the year.

Beyond variance tracking, the budget serves as a key tool in evaluating procurement strategies. When a CES client seeks to sign a new supply agreement or hedge a position in the market, the budget provides a useful reference point to assess the financial implications. By having established a consumption profile, CES Analysts can quickly project the impact of various potential procurement options and see how those compare to historical rates. In setting budget values for unhedged market positions, the CES team will collaborate with our clients so that market risks are clearly identified. Subsequent rounds of pricing and product options can be quickly compared with the budget forecast to determine the magnitude of market movements in terms of impact to budget.

The budget’s annual process of compiling account information and updating expectations for energy consumption ensures that CES always has up-to-date information on a client’s energy needs. While the budgeting process rightfully places priority on larger accounts with higher energy costs, the process requires CES to take a complete inventory of a client’s accounts to make sure everything is included. In this process, old accounts are identified or replaced and the CES team can confirm that the correct accounts are included in related upcoming procurement activity or analysis. This thorough inventory can also be used for a variety of follow-up analyses, including CES Carbon Tracker and building efficiency comparisons. The budget identifies business-as-usual costs which are frequently used to forecast the impacts of energy projects or run various scenario analyses. Having a complete energy budget sets up all the necessary inputs for a wide variety of follow-up projects and ensures that CES is relying on the same information and assumptions that our clients are working from.

CES’ Commitment to You (and Your Budget!)

2022 and 2023 budgets have been challenging in several respects. The variable impact of COVID on our clients’ operations saw some energy consumption remain somewhat consistent with historical trends, while others saw significant changes that may be likely to continue. Many electric utilities around the country have filed annual transmission rate updates in the last twelve months which have shown significant jumps versus historical rates. The natural gas market has also been extremely volatile, with market futures and outlooks today looking very different than they did six months ago. Especially given these challenges, we recognize that no budget is perfectly accurate and a key part of the value in having a detailed budget is being able to project the impact of these variables and understand future variances. In this way, the budget provides a crucial lens through which to interpret the day-to-day changes we see in such a dynamic energy environment.

While reviewing accounts lists, looking through invoices, and dissecting utility tariffs is not always the most glamorous analytical task, we believe doing this work is worthwhile to not only build a more accurate budget but also to set up future analyses. Budgeting at this level of detail allows us to differentiate the impact of a transmission rate increase or project the avoided costs resulting from a new solar installation. The exercise of building a budget leads our team and our clients to have a better understanding of how they consume and pay for their energy. All of this attention to detail and nuanced understanding of our clients’ energy needs is part of what sets CES apart when it comes to utility budgeting and this same approach permeates all subsequent project work. 


Photo by: Towfiqu Barbhuiya

 

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