Living With Your Utility Budget. Common Energy Budget Misconceptions

Transcription

1 Living With Your Utility Budget Common Energy Budget Misconceptions

2 Wise Up To Keep Surprises Down. Budgeting for an expense that can behave erratically from month to month can be a challenge. Between creating the original budget, adjusting to successes and failures of the past year and working within your established budget over the course of the year, there are numerous factors to understand and control. Those responsible for energy budgeting often operate under common misconceptions that can undermine the development and tracking of a thorough and accurate budget. Consider these alternative approaches as we discuss common misconceptions of utility expense planning. Misconception #1: Budgets Can Be Easily Set Based On The Accounts Payable Costs From Prior Year. Adding a single percentage factor to accounts payable costs as you develop next year s budget won t get you far when budgeting for energy. To do that is to make assumptions about your General Ledger (GL) that probably aren t accurate. Your GL may not be as clean as you d expect. There may be transactions you expect to be hitting the GL that haven t, or you might receive a large credit over the course of the year that will impact your budget. Your GL is likely to include accruals. Depending on how those have been calculated, you may or may not want to include them in a different year s budget going forward. A portfolio-wide escalation factor for energy rates will likely result in variances at the state level. If you need to report against state-level budgets, a portfolio-wide factor will not be sufficient. Establish both a usage and unit price baseline down to the site level. Be careful when planning for billing periods, normalize usage data to when it is actually used and correlates to your fiscal calendar for example, bills received and paid in May are for energy used in April. It s important to match usage to the correct timeframe and quarter. As billing cycles can range from days or beyond, don t fall into the trap of using an average number of days to set billing periods. If you budget for 30-day billing cycles across the board, you could end up paying two bills in one cycle. This could lead to problems down the line when you have to explain variances that are due to the timing of your payments rather than identifying the true issues. When budgeting on a state, regional or site level, be sure to keep in mind that unit price volatility will vary by region. Use market intelligence to plan for unit price changes at the utility or regional level for more accurate site-by-site budgeting. Common Energy Budget Misconceptions Living with Your Utility Budget 2

3 Misconception #2: Energy Can Be Accounted For Like Any Other Expense. Unlike other operating expenses, there are many variables and a lot of fluctuation in the world of energy and energy providers. As mentioned previously, the length of energy billing cycles can vary by month and can be drastically different depending on the utility in question. Some water companies, for instance, bill every three months. Bills received in a given month largely reflect usage from the prior month. Do not align your energy budget with the amount billed each month in the preceding year because your data would be about a month off. You must consider accruals in your budget. Decide how you will calculate and incorporate them into budget planning for the coming year. Always book a full period of expense using accruals, rather than budgeting based on bills that have been paid. Whatever your accrual methodology, it needs to be in sync with how you re actually booking your expenses and consistent with your budget development process. If expenses are only booked based on bills being paid, you need to budget that way. These processes must be aligned or you ll be trying to account for variances that are purely the result of the timing. Another good practice is to use seasonally adjusted accruals to help resolve inaccuracies of projecting expenses during shoulder months, those months when you re transitioning from winter into spring and summer or from summer into fall and winter. In these months gas usage and cooling is either trailing off or ramping up. Booking energy expenses during shoulder months tends to under-accrue during months with increasing consumption and over-accrue during months of decreasing consumption. To reduce the impact of seasonality and project more accurate accrual during these times: Develop site level indexes that reflect month-over-month changes in expense due to seasonality and apply those indexes to accrual calculations. Look at the typical usage profile during transitions from one season to the next and how much of a percentage change occurs. Account for these shoulder month profiles when budgeting for the coming year. Use the most recent weather patterns to estimate usage changes. Has it been getting cooler each week? If so, take that into consideration as you project energy needs for cooling. Common Energy Budget Misconceptions Living with Your Utility Budget 3

4 Misconception #3: Variances Can Be Reported and Analyzed in Terms of Dollars Only. In truth, cost provides little insight into what s driving the actual variance from month-to-month and year-to-year. As you build your budget, keep track of unit cost and consumption. This will allow you to analyze how you re doing from these more specific standpoints as you compare your performance against your budget and provide better insight into the source of the variance. When reporting variances, break the explanation into primary cost drivers such as unit cost, which is affected by market swings and rate changes, as well as usage at the site level and unusual billing, which leads to unusual accruals and budget variance. Reporting variances is about more than dollars. It s also about looking at it in terms of different levels. How is my entire portfolio doing in terms of cost drivers? How are things unfolding with energy spend compared to what I planned for? How are individual sites and regions performing? Reporting variance analysis is made easier when you track unit price and usage in addition to cost. You will be able to better explain how your business is performing against the budget, where any problems lie and how they can best be resolved. For example: Overall monthly financial results for utility GL equal 3.2 percent over plan when accruals are included in the analysis. Expenses for the month were 10.7 percent over budget, driven by: Unit price 5.8 percent over budget Overall usage decrease of 4.5 percent Year-to-date results for bills paid shows 3.3 percent over budget in utilities, driven by: Unit price 9.8 percent over budget Overall usage decrease of 5.9 percent Based on current trends, we expect to end the year at roughly 3.5 percent over budget. State and regional level analysis will help to drill down and identify where the issues lie. If cost seems out of control in one given area in a state where you have deregulated supply contracts, you can review those contracts to identify any possible corrective actions. Site-level analysis will identify specific places where action needs to be taken. Walk through those sites that are performing worst against your budget. Is it a billing issue, or a site performance issue? Common Energy Budget Misconceptions Living with Your Utility Budget 4

5 Misconception #4: Variances Are Only Useful For Managing Up in the Organization. While it is true that there certainly is a managing up side to variance analysis, it is also important for managing down. A lot of data analysis will inform a relatively simple explanation of what s going on from an energy spend standpoint across your portfolio, what actions you re going to take (if any) and why. As a result, you ll be able to: Ensure expenses are being allocated correctly Identify trends in variance that support re-forecasting usage Reduce future surprises by understanding where fluctuations in energy spend originated Using variance analysis for managing down is also very important. Identifying poor performers through site level analysis will put the wheels of change in motion. Use the financial data to show that a closer look must be taken at a specific site where expenses are higher than projected. Was it a budgeting issue? Is usage far greater than it should be? Asking these questions is the first step to getting site level variance under control. Common Energy Budget Misconceptions Living with Your Utility Budget 5

6 Conclusion Living with your budget is hard work, but it is a manageable process. The tactics described here will help keep surprises, or variances, to a minimum. Remember that your approach to budget development needs to be consistent with how expenses hit your General Ledger. Keep track of assumptions like usage and unit cost so you can analyze variance in terms of their impact. Make sure you know how your accruals are calculated and budget accordingly. Finally, use your variance information to take positive steps moving forward, reforecast and operational practices changes for example. About ENGIE Insight ENGIE Insight, formerly Ecova, makes businesses and utilities more successful through energy and sustainability management. For more than 20 years, we have led the industry in leveraging insight and data to drive powerfull results for our clients. We provide fully managed, technology-optimized solutions to help our clients navigate the changing energy landscape. CONTACT US TODAY 1313 N Atlantic St Ste 5000 Spokane, WA (800) info.insight@engie.com engieinsight.com ENGIE Insight Services, Inc. All rights reserved.