Hedging for sustainability—November/December print edition

The process of energy hedging can yield savings that in turn support sustainability projects

December 11, 2012
by By Alison Huzul

Just like in our homes, energy is required to run our site locations, data centres and our managed customer facilities. Because energy is bought and sold on an exchange just like a commodity, energy costs can swing wildly depending on a number of market factors, including current and forecasted economic conditions, natural gas, coal and crude oil supply and demand factors, geopolitical events, weather forecasts and changing regulatory legislation.

Traditionally, businesses purchase all of their energy on one-, two- or three-year contracts, but this does not optimize energy procurement. It puts the purchasers at the mercy of the markets when the contract term expires. Unfortunate timing can produce a 30-, 50- or 90-percent increase in energy costs. A downward market can also be a threat. During a market decline, purchasers can sacrifice significant savings by locking in at a higher fixed price when markets retreat.

Energy hedging
Energy procurement has become much more strategic as markets open up and there is an increased focus on sustainability initiatives. Finding a way to manage price volatility and control energy budgets is important in creating a competitive edge in a very competitive data centre market. One strategy I’ve used for protection against spikes in energy costs has been to lock in a portion of prices at historically all-time low rates. Traditionally, energy purchases would be made in the fall at a fixed rate, but this strategy could miss the best opportunity to buy forward contracts, especially if prices bottom out earlier in the year. To guarantee future costs, take advantage of market fluctuations, mitigate risk and have additional funds to re-invest in sustainability, a different approach to energy procurement was required.

The process of energy hedging works by committing to a portion of the energy in the future at a set price. If market rates go up, the lower agreed upon price is still honored. However, another portion of the energy enjoys the current market lows. By evaluating usage rates at our largest site locations (Texas, California, Singapore, Australia and the UK), our supplier’s sophisticated market forecast models are employed to figure out the best time to buy the fixed portions. Typically, more of the energy requirements are locked in closer to the time that the resource is needed. Working strategically with energy suppliers, their expert trading desks and tools help to determine and share just the right amount of risk to yield the best possible pricing. It is critical to always be looking ahead to take advantage of market timing opportunities. We are already building in hedges for our 2013 energy requirements.

The energy procurement strategy is a sophisticated risk program that allows us to take advantage of market volatility, gain transparency and lock in lower prices in the wholesale energy market. It also gives us cost certainty based on our budget objectives and risk tolerance. Our global procurement department has established strong partnerships with suppliers in Canada, the US, Australia, New Zealand, Singapore and the UK and achieved over $18 million in energy savings for this fiscal year.

So what does that have to do with sustainability? It has a lot to do with it. The savings were able to fuel sustainable projects, including consumption reduction at peak hours, retrofitting lightings, cooling and by self-generating energy through solar projects around the globe.

This energy procurement strategy will yield more cost certainty, achieve budget goals and manage energy costs through periods of volatility. It will also sustain a lower cost for each square foot and reduce long-term consumption. Since energy is a huge cost in running data centres—both for internal and external customers—these savings help to achieve a competitive advantage and to grow our business.

Alison Huzul is global energy & sustainability procurement manager at Hewlett-Packard (Canada) Co.