When energy costs were largely regulated and fixed, hospital engineers traditionally purchased natural gas and electricity directly from local utilities. Today, a combination of market deregulation and the tools to actively manage energy as a financial investment have created cost-saving opportunities for health care facilities. New best practices make it easier for facilities to capitalize on the strategy.
The best-practices purchasing strategy has saved health care systems an average of 10 percent compared with traditional energy-purchasing methods that usually entail locking in a fixed rate over a defined period with their supplier, according to Mark Mininberg, president and CEO, Hospital Energy, an energy purchasing consulting firm that works with health care systems.
A newly published monograph called "Energy Procurement: A Strategic Sourcing How-To Guide" from the American Society for Healthcare Engineering (ASHE) of the American Hospital Association provides best practices and fundamentals of the strategy. The co-authors are Mininberg and Walter Vernon, P.E., CEO of Mazzetti + GBA, San Francisco.
They along with Craig Onori, vice president of operations, Lehigh Valley Health Network, Allentown, Pa., gave a presentation called "New Best Practices In Energy Procurement" at the International Summit & Exhibition on Health Facility Planning, Design & Construction in Orlando, Fla., in March.
The session focused on success stories and the fundamentals required to make energy procurement work. Mininberg explained that the three essential elements are:
- Establishing an internal energy committee that includes C-suite financial officers and facilities and supply chain leaders.
- Access to market analytics and expertise, particularly financial risk-management tools.
- Forming or joining an aggregation of hospitals with a health system or through a group purchasing organization to establish purchasing power leverage.
At the presentation, Onori said that by actively managing a mix of fixed-rate and variable-index energy contracts over a two-year period, Lehigh Valley Health Network saved $2.6 million compared with its prior strategy of buying most of its energy at fixed rates.
Determining when and how much electricity and natural gas to purchase to benefit from price fluctuations that occur throughout the year and even within a day requires expertise, he says.
“It's a complex market and there are a lot of variables, so that's where you need a good partner,” Onori says.
Actively managing its energy purchases with the help of Hospital Energy has enabled Adventist Health System (AHS) to experience substantial savings. Along with its purchasing aggregation of more than 40 hospitals in 10 states and an astute energy committee, the system has saved about $2.5 million over the past two years, says Jim Shirley, strategic sourcing manager, AHS supply chain management.
While the traditional method of locking in an energy contract at a fixed price for a period of time with a supplier seems safe, data show that it has, in fact, been more costly over the past 10 years compared with a hospital that actively manages energy purchasing in the wholesale market, Mininberg says. Again, a key to savings is knowing how to manage price risk and adjust volumes purchased.
When a hospital actively manages its energy spend, it begins by contracting with a supplier to buy energy at a variable-index (wholesale) rate, when the energy is used. The hospital then uses financial analytics to fix the price for portions of its energy load over time, Mininberg explains.
Best practices demonstrate that energy contracts based on a mix of index pricing and fixed pricing can minimize risk and capitalize on seasonal price fluctuations, he says.
“This approach balances the desire for lower prices and the need for greater budget stability,” he adds.
ASHE members can download the monograph from the ASHE website. Print copies also can be purchased.