Group Purchasing Saves Heating Dollars
Depending on your location and the crops you grow, heating fuel may be one of our most significant input costs. Some greenhouse operations in Colorado and California are mitigating that expense through a program that provides group purchases of natural gas.
Greenhouse Services Foundation, Inc. (GSF) is a non-profit 501 © (5) corporation that provides group wholesale purchasing of natural gas supply for greenhouses and agriculture-related business. Combining natural gas volume requirements from multiple facilities improves purchasing power and those savings are passed on to the program participants.
GSF maximizes savings by handling as much of the administration as possible.
“Having an active and involved board, as well as natural gas industry managers, has allowed the program to evolve and respond effectively to changing natural gas dynamics,” says Tagawa Enterprises’ Dave Tagawa, an early GSF board member and past president. “This unique program has proven to be beneficial for the growers.”
Group Purchases Step-By-Step
Here’s how the program works:
• Current areas of physical supply operation include California (PG&E: non-core) and Colorado (Xcel Energy).
• A volunteer board of directors provides oversight of the program. board members are owners or representatives from both Colorado and California participating growers.
• Natural gas industry professionals with more than 40 years of combined experience administer the program.
• Each grower signs a natural gas supply contract with GSF for full volume requirements.
• Each participant has an annual credit support requirement based upon peak monthly usage and pricing. Sixteen percent of estimated winter gas cost is posted as a cash deposit. This is held through the heating season and returned in the late spring and early summer months as a credit on the invoices. The balance of the annual credit support can be covered with a letter of credit, personal guaranty or cash. In lieu of the letter of credit or personal guaranty, monthly prepayment arrangements can be made for participants.
• Pricing is calculated monthly from the weighted average cost of gas. That month’s purchases and any pipeline imbalance trades are included in the calculation. The treasurer reviews and approves monthly pricing before invoices go out.
• Each participant has access to a special section in the GSF website, gsfi.net, where they can view volume history data for each meter, current natural gas market commentary and indicative future pricing.
One of the most unique features of the program is active supply procurement. Given the volatility of natural gas prices and weather demand swings, the supply portfolio for each area is made up of monthly, daily and term purchases. The program administrators are in the market daily and purchase decisions are based upon current usage, prices, weather forecasts and monthly balancing. This flexibility allows purchases to be made based upon the best economics for the group at the time.
Over the last several years, the board approved locking up a portion of the winter supply requirements at a fixed price. This smooths out price swings that can occur during severe winter storm periods.
Another feature of the program is price flexibility for large users. An individual grower may want a different fixed price level, term or volume than the board established. The program allows a large end-user to set its own volume and price levels and have the program administrator procure that supply on their behalf.
Benefits Beyond Direct Savings
There are numerous benefits for growers in the program. First, of course, is savings versus the local utility tariff sales rates. From October 2008 through June 2013, including all program costs, growers in the program experienced a combined savings of more than $3.4 million. This breaks down to be $0.72 per dekatherm (dth) for Colorado participants and $0.24 per dth for California participants.
Program administrators actively monitor the natural gas market on a daily basis and make procurement decisions based on keeping costs at a minimum, not to make extra margin.
“The fact that supply volumes, prices and imbalance trades are independently reviewed gives me confidence that my monthly pricing is correct,” says California Pajarosa’s John Furman.
Depending on the pipeline system, GSF will hold the transportation agreement or act as agent to manage the participants transport agreement and, if necessary, their existing supply contract. More time can be focused on the greenhouse business, eliminating the need for committing resources for market research or even employing a full-time energy manager.
The administrators can also act as agents for participants in other natural gas matters such as filing claims associated with class action lawsuits or finding a gas supplier on other pipeline systems.
Can Group Purchases Work For You?
Local utility rules, regulations and rates vary across the country. However, if growers are currently purchasing transport natural gas supply, it would be worth exploring. Here are a few considerations:
• On the local utility, determine how many growers could be aggregated and what their monthly/annual usage would be. Your local grower association may be able to help start the process with its existing members. There are economies of scale, so more volume is better.
• Check state and utility rules to see if licensing is required.
• Review the natural gas tariff sales rate structure with your local utility and verify that adequate savings can be realized from a third-party supply program.
• Identify transport agreement options. Understand the scheduling and balancing rules and confirm billing cycle(s) and sales tax responsibility.
• For program management, determine what structure and oversight would work best. Do not forget about legal, accounting and banking services.
• With credit, the structure of the program will determine which entity has the credit risk. Identify workable/reasonable options to address credit risk, such as cash deposit, letters of credit, personal guaranty or prepayment.
If such a program is impractical to work in a given area, growers should at least consider going out for bid as a group to see what the market can offer.