Measure and Benchmark Natural Gas Purchases
All PIM content was independently developed and reviewed to be vendor-, product-, and service provider-neutral.
This PIM provides a recommended methodology for measuring, benchmarking, and reporting key performance indicators that can help assure the success of your bulk natural gas purchasing program. (This PIM is not a how-to for purchasing bulk natural gas.)
Project Talking Points
- One way for hospitals to lower energy costs is to purchase bulk natural gas as a commodity rather than purchasing it from a utility. Doing this, however, exposes the buyer to risks from fluctuations in price and in the quantity of fuel needed. Buyers try to hedge against these risks with various strategies for buying natural gas that combine futures contracts and spot-market purchases. Energy buyers need to be able to measure, benchmark, and report results from implementation of their strategies.
- Measuring, benchmarking, and reporting the success of bulk natural gas hedging strategies is an art that is evolving as more facilities understand how to do it better. This PIM is a compilation of best practices from hospitals around the country.
- Generally, the measure of success in the procurement process is whether the strategy outperforms the budget for the relevant utility cost. Typically, smaller or more stand-alone hospitals tend to measure against budget, while larger organizations measure against utility cost.
- By assessing the success of natural gas purchasing strategies, facilities can aggregate purchases balancing usage across a portfolio and “settling” (under/over) across many meters rather than settling meter to meter. [Not sure “settling” is a good word here; what do you mean exactly?
- Using an RFQ/RFP in the contracting process helps drive down transportation and various utility markups that are added to strip or spot prices. Even though we are all risk takers with respect to the prices of these commodities, add-ons can often add 15 to 25 percent to the unit cost.
- Understanding what matters to CEOs and CFOs will improve design of your benchmarking and tracking program. For example, if a CEO best understands cost versus utility, then that comparison should be made.
- One facility manager observed: “Every broker (typically a friend of a CFO or CEO) promises that their financial model for procuring gas or electricity will beat the marketplace if you pay them a fee for doing so... I have not found this to be true; everyone looks great when prices fall while everyone says 'ouch' when commodities go sky high.” That is, it is probably more important to hedge your risk by reducing your energy consumption than it is to try to outsmart the markets.
Triple Bottom Line Benefits
- Cost benefits: Bulk purchasing of natural gas is fundamentally a cost-savings opportunity if tracked and managed effectively.
- Environmental benefits: Natural gas is a “cleaner-burning” fuel source compared to most other fossil fuel sources.
- Social benefits: Demonstrating that the money saved through effective management of costs helps pay for patient services encourages the continued deployment of viable sustainability strategies that have been shown to be an important community satisfaction and quality measure.
- Determine and engage your stakeholder group. Identify your experts, both internal (e.g., the person(s) who buys your organization’s energy, the person(s) in facilities/engineering responsible for energy management) and external (e.g., the outside expert in your group purchasing organization, a utility account rep, an outside adviser/consultant). Then identify additional stakeholders who will be involved in any financial data gathering and reporting (e.g., your CFO, accounts payable staff who receive and pay utility bills, others on the receiving end of the reporting).
- Gather information about current energy expenditures. In many hospitals, the facility manager never sees the utility bills and so has no sense of the amount of money being spent. It is essential that facility managers have access to as much data about energy consumption and cost as possible so as to better manage them. Aggregate all functions of energy purchase, energy management, and energy accounting and assign primary responsibility for tracking these activities to one person. Use a collaborative tracking system as described in this PIM, and share the resulting data with relevant functional areas. The information provided by the tracking can be used to report on the success of consumption and purchasing management strategies.
- Maximize your vendor resources, if you use a consultant to help with purchasing. These vendors can often supply the data described in this PIM as part of their basic services.
- Confirm your performance against goals. This is a function of both buying strategy and consumption. One way to confirm performance is to measure absolute expense against absolute budget. In other words, measure success as a function of managing both demand and cost against a dollar expense budget. Another way is to disaggregate your buying strategy from consumption and measure both. Consumption is easy to measure and should be controlled independently; less consumption is always better. Then measure your purchasing strategy as a weighted average cost compared to a range of indices. Leaders are likely to care less if you get one right and the other wrong; they will want to know the result, which is that your program outperforms the budget.
- Determine key performance indicators. Listed below are examples for tracking some performance measures. The more KPI’s you track, the better understanding you will have of your program’s performance; therefore, we suggest you track all of these:
- Absolute expense against absolute budget. This is likely to be the measure the CEO cares about most.
- Comparison to utility cost. This will persuade most CEOs/CFOs that you are doing better than they could get by buying from the utility.
- Total usage (MMBtu) building to building and year to year (regardless of price). It is important to manage number – a comparison against the relevant index for the local market - downward continuouisly.
- Weighted average cost per MMBtu (MCF) year over year (i.e., your success in keeping costs below last year; maybe more of a market indicator than a success indicator, but probably pretty easy, and probably persuasive to some CEOs).
- Weighted average cost per MMBtu (MCF) as compared to riding the spot market for your index (typically not NYMEX). (This tells you how good a fortuneteller you are.)
- Weighted average cost per MMBtu (MCF) as compared to NYMEX. (This less-relevant, tertiary benchmark measures your ability as a fortuneteller.)
- Consider whether to connect this program with an investment strategy. Organizations with an investment arm can take positions in commodities, including energy. These investments tend to reinforce or counteract facility purchases. This is a very interesting idea, and an arrangement that could benefit from some kind of coordinated approach rather than dis-aggregating financial thinking about utilities. Consider a discussion about this approach with your financial experts.
We are looking for examples we can put on the Roadmap to help others; can anyone supply some?
We are looking for examples we can put on the Roadmap to help others; can anyone supply one?
Regulations, Codes and Standards, Policies
NOTE: Regulatory issues may determine whether you can purchase natural gas in your region/state, but this PIM is solely focused on measurement and benchmarking once you are already purchasing natural gas in bulk.
Energy, Supply Chain
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- Contracted Services
- Supply Strategies
- Alternative Sources
- Engineering/Facilities Management
- Purchasing/Materials Management/Supply Chain
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