Learning To Apply Financial Options
To Energy Purchasing

(Tip of the Month for May 2004)

As energy pricing becomes less regulated, it also becomes more volatile. In other Tips, some of which have not yet been posted on this updated web site, we addressed ways to apply some types of financial instruments (e.g., hedging, futures) to limit the impacts of such volatility on retail energy bills, whether it be market-based or weather-based. A wide variety of financial options exists to control such uncertainty but, to most engineers and facility managers, those options sound either like gambling or like the economics class they slept through back in college.

Many who would like to pursue financial options may feel handicapped, however, by their lack of knowledge of the lingo and concepts involved. Such ignorance is a problem to be conquered by learning, and should never be a barrier to using cost-saving methods. Some think they will catch up by pursuing a degree in business management, only to discover that few colleges provide the training needed for the application of financial instruments to energy use.

To help our readers fill in such gaps, this Tip provides a brief guide to educational resources focused on explaining and employing financial methods in energy procurement and cost control. While most are designed for energy brokers and suppliers, end users and their consultants could also benefit from accessing such materials. Doing so will help acquaint them with the language, methods, and procedures for controlling the pricing of energy they purchase.

Getting Started

Most who are charged with managing energy are versed more in engineering than finance, making for a steep learning curve. To get the greatest value out of financial training, a graduated approach is suggested. Start by familiarizing yourself with financial energy products through such web sites as http://www.nymex.com, http://www.wrma.org, and http://www.cme.com. Take notes and review their glossaries (see also the Energybuyer.org Glossary, which includes many financial energy terms).

If you are already involved in energy purchasing, a chat with your present supplier on the financial options it offers will provide a cost-free exposure to the basic issues. But don't sign anything until you feel fully conversant with the risks.

Make your first dollar investment in a good basic book focused on the application of financial instruments to energy use. While most view energy trading from the supply side, such a perspective is also useful for end users. Forget about finding them at your local bookstore: most books found in their Business and Economics sections examine general stock and commodity market trading, which may be difficult to apply to energy procurement. Here are some of the better choices (and where to secure them):

- Managing Energy Price Risk 3rd Edition: The New Challenges and Solutions (published by the Risk Waters Group, it may be found at http://riskbooks.com/Energy%20and%20Commodities/Managing-Energy-Price-Risk.php. If you see the price listed in the wrong currency, click the box that says “Choose your currency," which allows you to specify US dollars.

• Managing Energy Risk: a nontechnical guide to markets and trading (Pennwell)
   
• Trading Natural Gas: A Nontechnical Guide (PennWell)
   
• Fundamentals of Trading Energy Futures & Options (Pennwell)
   

Pennwell books are available at http://store.yahoo.com/pennwell.

• Guide to Purchasing Electricity and Gas (Fairmont Press)
   
• User's Guide to Natural Gas Purchasing and Risk Management (Fairmont Press)
   

Fairmont Press books may be found at http://www.aeecenter.org  (click on "Books").

While other publications in this subject area are available, some require an understanding of statistics and higher math that is not essential to grasp and use financial instruments in retail energy procurement.

If you conclude that financial energy options are not for you, your loss at this stage is minimal: most of these books cost less than $100.

Next Step: Online Seminars

Once a good understanding of the basics has been obtained, take an online course (preferably a self-paced version that can be taken at your leisure). Jumping directly to live training without developing a good grasp of the concepts at one's own pace could result in expensive confusion that sours further interest in employing these options.

Web-based classes typically involve one or more sessions in which attendees listen in by speakerphone to an instructor as they watch slides sent to PCs from a private web page. Such classes avoid the cost and time inherent in traveling to a live seminar, but tend to limit interaction with instructors. Consider the following choices, most of which offer both live and web-based classes:

Association of Energy Engineers (AEE) - http://www.aeecenter.org (While most of its courses are oriented toward engineering, "Fundamentals of Buying and Selling Energy" focuses on energy procurement that includes use of financial mechanisms.)

PGS Energy Training - http://www.pgsenergy.com

Oxford Princeton Programme - http://www.oxfordprinceton.com

Power Marketers Association - http://www.energycatalogue.com/Seminars.aspx (a useful link to a variety of training resources)

Energy Seminars Inc. - http://www.energyseminars.com (wide variety of energy-related classes)

Enerdynamics - http://www.enerdynamics.com

Paradigm Training - http://www.paradigmtraining.com (both live and web-based classes, as well as very good, but pricey, books)

Some energy brokerages may also provide training to help potential customers become comfortable with financial energy options.

Cost for most online courses is in the $400 to $1,000 per person range. If you decide to take a live online course, be sure to secure the slides/texts in advance. Read them carefully and note your questions in the course materials so you are ready during the event. If the seminar cannot be repeated (some allow review for 30 days after an event), tape-record the call for later review. Note that using such a recording for commercial purposes (e.g., charging others to listen to it) would likely be a copyright violation.

Taking Live Training

Live seminars can be expensive. When travel and lost work time are added to a typical registration fee, one may easily spend close to $3,000 on a day's training. To maximize the value of that cost, it is best to precede live training with the other steps outlined above. Such repetition in differing formats is often the best way to develop a clear understanding of a complex or esoteric subject. Unless one is already quite familiar with financial energy concepts, a good portion of the content at a live seminar may be missed or misunderstood. Live events are the best way, however, to get your questions answered, make contacts, and see how others understand and use financial instruments to control energy costs.

Such training has helped many large organizations (i.e., those annually spending $1M or more on energy) save many thousands of dollars each year, making this form of higher education almost always a good investment.

Energywiz, Inc.
Adding New Dimensions to Energy Services ^SM