Alexander Zafran in Bricks & Bucks on July 15, 2020
Most of a co-op’s or condo’s budget – roughly 80% – is eaten up by fixed costs, such items as taxes, insurance and staff payroll. Now more than ever, boards need to make sure they’re spending wisely on the sliver of the budget they can control. And one item that many boards view, wrongly, as a fixed cost is actually a source of potential savings: the humble utility bill.
Not everyone realizes that through independent energy procurement, co-ops and condos have the opportunity to lower their electricity and natural gas expenses.
How do you know if your building pays the lowest possible cost for the energy it uses? It’s a straightforward question, but it’s not easy to understand utility bills. The technical terminology and complex line items can intimidate almost anyone into accepting whatever appears on their invoice. Customers shy away from asking questions like, “How do you record my electricity usage?” or “Why is my cost higher this month than it was last month?”
The first step is understanding what energy expenses entail and how rates are set. There are two components of energy cost: supply and delivery. In the supply portion, a supplier gathers electricity or natural gas from its place of origin, dispatches it along transmission wires or via pipeline, and provides it to the local utility. Then, in the delivery portion, the utility takes over and transmits the electricity or gas to the end-user. Until the 1990s, the utilities in New York City – Con Edison and National Grid – maintained total control over both supply and delivery. Today, while delivery costs continue to be regulated, supply costs are deregulated, which means customers can choose their own energy supplier.
So where do the cost-savings come into play? Customers who receive energy supply from the utilities are at the mercy of their prices, which fluctuate significantly each month. These supply rates are computed without transparency, consistency or certainty. Alternatively, consumers can shop for electricity and natural gas supply from an Energy Services Company, or ESCO, which enable consumers to buy energy at a stable rate for a given period of time – something the utilities cannot provide. More importantly, ESCOs may sell energy supply at lower rates than those tendered by Con Edison or National Grid. A property that enters into contract with an ESCO can achieve budget certainty in its energy supply costs, rather than paying whatever monthly rate is dictated by the utility.
Choosing a third-party supplier should be based on more than price alone. The competitive landscape of ESCOs in New York City contains multi-billion dollar corporations, middle-market companies, and even mom-and-pop businesses. All ESCOs must be scrutinized and vetted qualitatively and quantitatively.
Conversations with a potential supplier should include the following questions: What’s in the fine print of their contract terms? What are their billing practices? And most importantly, can they be trusted to do the right thing? Any ESCO that wishes to do business with your building must be able to answer these questions. Although boards and their property managers are capable of conducting this due diligence on their own, an external energy advisor or consultant can be brought in to handle the procurement process from start to finish, vet the ESCOs thoroughly, and offer an independent, unbiased recommendation.
Energy procurement places control where it should be – with the consumer, not the utility. Co-op and condo boards can exercise full authority in deciding the price, contract length, and specifications that meet their needs. And by doing so, they can trim that 20% portion of the budget pie that’s under their control.
So now, ask yourself in earnest: is your cooperative or condominium paying the lowest possible cost for its energy?
Alexander Zafran is a senior consultant and business development lead at Aurora Energy Advisors. If you’re interested in learning more about energy procurement, he can be contacted at firstname.lastname@example.org.
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