During budget season, finance teams are reminded that some of the seemingly easiest things to include are actually the most difficult to budget for. Utility payments and energy costs are in that category.
Even for companies that have a fixed billing arrangement, utility costs can fluctuate thanks to internal changes and external factors. As the annual budget is created, the office of finance must use the tools at its disposal – from involving stakeholders to scenario planning – to create a usable and predictable energy budget. For those using older and inflexible tools, like spreadsheets, to create their budget, utility bills could undermine the organization’s bottom line.
Complexity in Forecasting Energy Costs
Forecasting an organization’s energy bills for the coming year isn’t as easy as summing up the previous year’s bills and adding a standard percentage, or even taking the monthly budget from one facility and applying it to the next. There is a great deal of variability in what companies are charged by their utility companies.
Energy consumption can vary from facility to facility, and even throughout the day. Utility providers must purchase enough capacity to handle the greatest demand throughout the day. Some providers use a cost assumption called a capacity tag to compute demand, which can be based on as little as a 15-minute span of peak usage.
Capacity tags can make up as much as 20 percent of an organization’s energy bill and can impact the organization’s overall bill in the next year. Even if an organization uses less energy overall afterward, a company may still be impacted by a capacity tag for some time into the future.
Related to capacity tags is demand charges, where your utility company charges you a certain rate that is determined by your peak usage during the day. Without an understanding of what your peak usage will be, and what the rates are for that peak energy use, it is challenging to predict your energy bills.
New facilities can add complexity to a budget as well. With no historical information to draw assumptions from, a new building or workspace may make the creation of an accurate budget for energy costs next to impossible.
Looking at similar facilities to help with energy budgeting may not help. New facilities may have better energy efficiency, newer equipment may run better with less power demand, or power-saving improvements may have been made during the construction or renovation of the space.
Another variable that can complicate comparing one facility to another is the location. Even if the facilities are in similar climates with similar staff and equipment requirements, being in different states or regulation areas impacts charges, tariffs, and rate hikes. The power may be a certain rate with few pass-thru costs from one state, while another has a regulated increase scheduled for some time during the fiscal year. These are important considerations that can create variability in your monthly budget from facility to facility.
Building Out Your Utility Budget
The key to creating an accurate budget for company energy usage is to establish a baseline and document your assumptions. this provides a solid foundation that you can expand from to customize your budget.
Using the previous 12-months of data, analyze natural gas, electric, and any other utility usage against company activities. Factor in energy-saving policies that have been put into place. You should also research any planned billing or tariff changes for the areas in which you have buildings.
Leverage the knowledge of your stakeholders to understand what impacts various initiatives might have on utility consumption. Were factory teams running two shifts and weekends last year to meet specific client demands? Are their plans for new products that require equipment to run longer? Does the company have a new print policy that includes removing 50 percent of the organization’s printers? Policy changes and initiatives can impact energy usage and must be taken into account.
Once information is gathered, a modern budget application will allow the finance team to run scenarios to clarify what changes to the established assumptions will do to utility budget projections. With various scenarios played out, in the virtual sense, it will be easier for companies to plan for changes and fluctuations in energy usage and billing.
Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.