Insights | October 20, 2021
What to Consider While Creating a Budget for your Annual Electricity Expenses
Electricity can be a large and recurring expense for many companies.
It is essential for business owners to budget their monthly electric bills as accurately as possible, since costs can represent a significant portion of a business’s operating expenses. As with all major expenses, a budget should be developed to improve efficiency and help forecast and manage expenditures.
However, many businesses struggle to budget for their electricity because the invoices can be very complicated. This is because the cost of electricity is a split commodity cost from the all-in energy rate and there are many factors that depend on an individual companies and their different needs, which make up an electricity bill. Some of these factors include how much energy a company uses and how efficiently it is used, the time in which is used, facility size, and regionally set energy rates.
Charges on an electricity bill are not limited to the actual cost of electricity, which and they are not charged at a fixed price. This means that even if a company’s electricity usage and rates remain consistent during a certain period, it does not necessarily mean that their bill will be the same from month to month.
There are additional components that affect an electricity bill, often forgotten or unknown, which makes it more difficult for a business to accurately budget for energy costs.
Energy Costs to Consider
Transportation and Distribution Charges
Transportation and distribution charges on it also includes charge for the transportation and distribution of electricity. Transportation and distribution charges cover the cost of delivering electricity and recover the costs of sustaining the grid. For example, customers are charged when upgrades or repairs to the grid are performed, which include the maintenance of powerlines, utility poles, substations, transmission towers and other equipment, and the cost to restore electricity after storms or other natural disasters occur.
Facility & Operational Changes
While drafting a budget, remember to factor in operational changes such as reduced hours, increased production, new site construction or anything else that may impact energy usage.
Your Utility Rate Class
In order to plan a budget, it’s essential for a business to know their rate class in order to figure out what rate they are paying each month. Without knowing this information, it’s not possible to forecast a monthly electricity bill accurately, because electricity rates are determined by a rate class, which is usually based on a facility’s usage profile.
An electricity invoice may include capacity line items, which are charges related to energy demand, and can impact a budget if they are not considered. They are based on the highest amount of energy that a consumer is estimated to use during a month or year in some locations. It is essentially a fee to ensure that the most electricity a user is predicted to consume is available when needed. On days where energy demand reaches its peak, energy users pay the cost for the generation needed to keep up with demand.
Utility Rate Increases
Although utilities are federally regulated and required to file for rate increases, what gets approved can differ from what was initially requested. Staying up to date with current utility rate cases will allow you to forecast next costs in the following year.
If electricity is purchased through a competitive supplier, the rate is secured in a contract. Most energy contracts are not synchronized to your fiscal year. Energy costs will likely fluctuate in the months after a contract expires, so calculating the start/end dates accordingly into a budget is important to remember.
Each Energy Account/Meter
If a business has multiple accounts or meters, each meter/account should be examined separately to ensure the most accurate cost prediction. Smaller accounts usually have lower rates and should be considered independently from larger ones. Also, even if two facilities are the same size, or the same energy demand is predicted, it should not be assumed that an electricity bill will be similar for each meter. There are many reasons for this, but efficiency is a primary example and can have a major impact on an electric bill. Employees in one facility may use electricity more efficiently than in another, and the efficiency of equipment can also vary depending on the brand or how
old a machine is.
Although paying taxes does not seem like a line items often forgotten, many companies do often fail to forecast future energy taxes and any tax exemptions which apply to them.
Cleantech & Renewable
Many companies take advantage of programs that offer renewable energy credits, tax credits and other incentives. When developing a budget remember to factor them in.
Before drafting an annual budget, it may be helpful to speak with an energy professional. A knowledgeable energy advisor is, first and foremost, an expert in energy, which makes them a valuable resource. Their top priority is advising business owners and facility managers on all the opportunities that are available to commercial and industrial energy users.
After reviewing electricity bills and discussing the specific details of a business, a consultant can explain any charges that you do not understand so you can budget for them accurately. A consultant may also be able to recommend ways to save energy, so your energy costs will decrease over time.