Volatile energy markets require examination of budgets

February 1, 2008

The state of the overall economy along with industry-specific challenges, such as uncertain reimbursement fees, presents a challenge to even the most experienced healthcare executive who must set a firm budget and stabilize costs.

As healthcare costs continue to rise, patients, doctors, and hospital administrators alike are feeling the strain. The state of the overall economy along with industry-specific challenges, such as uncertain reimbursement fees and the rising cost of medical equipment, presents a challenge to even the most experienced healthcare executive tasked with setting a firm budget and stabilizing costs.

The healthcare industry is not the only one struggling to rein in costs. Across the board, industries are seeking to stabilize budgets while meeting core business objectives. Rising energy costs and a volatile energy market are adding to the challenge. While unpredictable energy prices can threaten the bottom line of any business, the healthcare industry is at a competitive disadvantage when it comes to reallocating resources to cover unexpected price spikes. Whereas some industries can shift production schedules or curtail electricity use during times of peak demand or high prices, hospitals and patient care facilities do not have the freedom to simply reduce electricity usage when energy prices soar.

However, new methods of energy management are helping level the playing field. In fact, energy management is evolving into a complex business activity that goes well beyond examining energy demands, or introducing efficiency technology and curtailment options. Just as individuals turn to expert financial advisors to minimize risk and maximize personal retirement investments, companies are turning to CFOs and internal risk management experts to maximize energy investments and help design long-term energy purchasing strategies.

While healthcare and outpatient facilities may not be able to curtail energy use on demand, they can explore new options in electricity procurement. Designing a risk management-based energy purchasing strategy has been demonstrated to deliver long-term stability and consistency, making it a viable option to a CFO seeking to control energy costs.

While most healthcare organizations do not have the resources to support an internal energy procurement department, they need not face a turbulent energy market alone. By partnering with a competitive energy supplier, organizations gain access to a dedicated team of energy experts who work with the organization to design and implement a customized energy management strategy that accurately reflects the customer's energy risk profile and budget goals. They provide real time monitoring and market analysis on a daily, weekly and monthly basis to help key decision makers achieve their energy cost objectives.

How to implement a risk-based purchasing strategy

Getting started with a risk management-based energy purchasing strategy begins with four steps:

1. Analyze short- and long-term energy needs and costs.

2. Identify all external risk factors that can affect the bottom line, including rising prices of medical equipment, fluctuating insurance rates, and coverage.

3. Evaluate overall cash flow and establish a tolerance for risk.

4. Establish a long-term energy purchasing budget.

As with any long-term investment, spreading the market risk over many years mitigates the impact of any one individual market fluctuation. This also creates a more predictable cost environment for all organizations regardless of appetite for risk. With a dedicated team of energy experts on hand, choosing when to buy and when to lock in at low prices or adjust a purchasing strategy becomes a manageable process. The result is a risk management approach to electricity purchasing that avoids exposure to volatile market prices and inserts a desired element of budget control.

Impact on the bottom line

Proactive energy procurement strategies have proven to be an extremely effective means of managing through volatility in the energy market. Customers across a variety of industries have kept costs in line and achieved their budget goals, even where market prices have risen dramatically.

Bringing a forward thinking risk management approach to energy purchasing is helping CFOs and the entire financial department regain control of previously unwieldy energy expenses. Freeing an organization's budget from the mercy of a volatile energy market makes it possible to put the focus back on allocating resources to core business objectives. For the healthcare industry, this means freeing up additional dollars that can be devoted toward meeting patient needs.

Bruce McLeish is senior vice president of products and pricing for Constellation NewEnergy, a leading competitive electricity supplier and developer of i2i (information to implementation), a risk management product for commercial and industrial customers.