Penn State program helps state universities avoid $7.5 million in energy costs

August 31, 2006

University Park, Pa. -- At a time when consumers are faced with rising costs in electricity, natural gas and oil, a Penn State program has helped the State System of Higher Education avoid $7.5 million in energy costs since 1998.

Run through the non-profit Penn State Facilities Engineering Institute, the program goes bargain hunting for energy on the open market, seeking the cheapest electricity and natural gas for the state system's universities.

James Myers, institute director, said the old method of energy procurement was to simply buy electricity and natural gas from local sources.

With the deregulation of electricity in Pennsylvania, the state system approached the institute about trying to shave its energy costs.

Myers said shopping for energy can be extremely complex because there are many prices involved, such as the tariff price, which is approved by the Pennsylvania Utilities Commission, and the market price.

He explained that the price of gas and electricity are further broken down into a number of component costs, such as production and transportation. By doing some comparison shopping, a buyer can save on these various expenses.

"We shopped on the deregulated markets and tried to beat the local utility's price," said Kenneth Davidson, institute associate director.

Institute personnel also monitored the energy markets, keeping an eye on key indexes such as the New York Mercantile Exchange (NYMEX), which is the world's largest commodities futures exchange. NYMEX deals with the purchase and sale of commodities such as energy, metals and other products. The institute regularly interfaces with utilities and energy marketers and has compiled extensive databases of billing information used to shop for energy.

Davidson said that the institute attempted to be strategic when purchasing energy for the state system. For example, they avoided buying natural gas in winter or electricity in summer.

Myers said, "We also took advantage of market timing and the multi-day bidding event to minimize energy costs."

The institute also tried to insulate the state system from price spikes. "You can get variable prices with the option to lock in a fixed price when NYMEX prices take a downturn," Davidson said. The same strategy was successfully used by Southwest Airlines recently as the company locked in long-term contracts for jet fuel before the prices of crude oil shot up this summer, enabling Southwest to keep costs down.

Since the 1998-99 fiscal year, the state system managed to avoid $2.2 million in electricity costs and $5.1 million in natural gas costs.

The effort has been so successful that the institute has been receiving inquiries from other states such as Texas, Massachusetts and Ohio, as well as interest as far away as New Zealand and Ontario, Canada.

"They all wanted to know how we shop," said Davidson laughing.

(Media Contacts)

Last Updated March 19, 2009