It’s that time of the year: forecasting your energy budget requirements

09 Dec 2015Archived News Gilles Walgenwitz Climate Change Matters

While the holiday season is fast approaching, Energetics knows that for many clients it is also the time that energy budgets need to be set for the next financial year. Whilst some clients simply apply a unique escalation factor to historical prices and use the most complete set of 12 month energy consumption figures available from their energy reporting system, others are interested in developing more thorough, evidence-based energy budget projections which consider a number of uncertainties.

This article outlines Energetics’ advice when tackling the energy budgeting challenge. 

Five steps to effective energy budgeting

There are a number of typical steps Energetics considers when facing this challenge.

1. Know the assets you have and their different energy-use profiles.  Sites need to be grouped based on their consumption level (eg small accounts/large accounts), jurisdictions, and expected variations in energy use that may arise from growth and consolidation. Differentiating large office buildings and data centres from small retail branches or say, differentiating large exchange centres, from base transceiver stations and small cell repeaters, accounts for potentially very different energy requirements over the coming year.

2. Develop load forecasts: Energetics has designed a number of budget models for our clients to better incorporate the most influential external drivers of energy consumption and demand. Whilst econometric indicators such as population growth figures can be a proxy for future energy consumption of some asset classes, say for a water distribution network, we also consider the application of bottom up models ie the different types, numbers and uses of equipment (eg the number and type of radio base stations and data traffic for a radio access network). This step involves quantifying the relationship between annual changes in the external drivers and changes in energy consumption levels (using a regression modelling technique for example).

3. Ensure input data integrity and normalisation: like all models, Energetics inputs the forecast model with reliable data, possibly following data cleansing and normalisation procedures. We see this step as critical.

4. Adjust the baseline projections for unique events.
Greenfield development, site closures and consolidations, or block load variations associated with energy intensive sites
Energy efficiency, demand response/load curtailment and self-generation projects in the pipeline.

5. Estimate future energy price variations: this can be straightforward if you locked in an energy retail contract under a fixed price partial volume flexible standard arrangement that covers the whole next financial year.

If instead you need a new retail contract, or are applying progressive purchasing, forecasting the exact level of energy prices at specific times is an uncertain proposition especially in the current market environment with increasing volatility and additional uncertainties created by factors such as the increasing penetration of intermittent energy sources.

However sufficient information exists on energy markets and trends to develop reasonable expectations about future energy price structures and rates.   Examples include:

  • Energetics estimates the future price curve for retail energy and environmental products using information from observed futures markets and combining it with forecasts generated by a bottom-up model which draws from fundamental market data (supply / demand balance). Combining both a bottom-up approach and a financial approach (based on the technical analysis of futures prices) has proven to be a good method for obtaining reasonable future energy price forecasts.
  • On the network side, Energetics typically refers to determination/access arrangement documentation from the regulators (Australian Energy Regulator, WA Economic Regulation Authority, NT Utilities Commission) as well as tariff structure statements and/or expected price trends from distribution businesses. In some instances we need to apply expert judgments to evaluate the likely approved revenue requirements, as currently we see conflict between the regulated businesses and the regulators. The current appeal by NSW Networks to the Australian Competition Tribunal to overturn the Australian Energy Regulator’s final determination decision is a good illustration of such uncertainty: if NSW Networks are unsuccessful in getting the AER’s determination overturned you can expect relatively flat network charges over the whole determination period ie until June 2019.  Whereas if there are successful you can expect, on average, a 10% + increase in network charge from 1/07/2016.

How can Energetics help your business?

When conducting a budget forecasting exercise, Energetics can also design a customer specific risk profile and budget goals that inform an energy procurement strategy over the next 18 months.

With a dedicated team of energy experts, 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.

Finally, improved budgeting following the steps detailed above provides a basis for a more accurate projection of future energy use and costs for given levels of activity - helping your business better monitor its energy performance and achieve savings.

For more information on Energetics’ budget forecasting services contact any of the energy markets team.

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