Energy services company Usource has major clients engaged in global pharmaceutical production and research across multiple facilities. World Pharmaceutical Frontiers talks to managing director Thomas Withka about how the company provides cost and process efficiencies by strategically managing its clients’ energy supply in an integrated manner.
World Pharmaceutical Frontiers: What is the role of an energy services broker?
Thomas Withka: Usource represents industrial, commercial, institutional, and government customers – all consumers of natural gas or electricity (or both) – and brings them together with potential energy suppliers. We continually assess the marketplace, strategically time offers to buy and then present the best proposals from qualified energy suppliers at one time. We partner with our customers in securing the best price, terms and length of contract for their operations.
Elite brokers such as Usource dedicate sophisticated training and state-of-the-art tools to monitor commodity markets on an hourly basis. This provides customers with the most current market information for purchasing decisions. Through a diligent, continuous review of the supplier community in the market areas we serve, we ensure that customers receive reliable and competitive energy.
With an intimate knowledge of supplier operations and business practices, the right broker is an invaluable partner in continually evaluating complex contract provisions in supplier offers. In essence, Usource professionals serve as a specialised energy management employee on the client’s staff.
What makes deregulated energy markets particularly difficult to negotiate?
Natural gas and electricity markets have similar characteristics to most commodity markets with volatile pricing changes, often moving several percentage points on a daily basis; for example, most energy price offers are valid at the time of the offer, but are rarely held overnight. This creates a complicated process of internal review and approval for most companies.
"Usource customers can take advantage of energy markets and extract the optimal pricing and terms available."
At Usource, we use a multi-step process to help customers manage this challenge. Our proprietary model tracks energy markets on a real-time basis, searching to match customer objectives. We help customers review supplier contracts before the bidding process, strengthening their position and avoiding the inequities often written into these contracts.
Our models generate pricing forecasts that help anticipate economic and business provisions prior to the bid date. As a result, our customers can take full advantage of energy markets and extract the optimal pricing and terms available.
This process forces suppliers to offer their best price first. On bid day, with standardised contracts, market objectives and aggressive pricing predictions in hand from Usource, the client can execute a contract with confidence.
What impact can the wrong energy management solution have on a facility’s ability to function properly?
Unnecessarily high energy costs and poor contract business terms can dramatically affect facility financial performance, competitiveness and viability. If a company fails to renew or secure a new energy contract before an old one expires, it usually has to revert to utility supply or another marketbased price – one that in most cases is higher than a competitively bid contract.
Further, the wrong company strategy in the hands of an inexperienced energy broker will result in missed opportunities and long-term cost increases; for example, firms that historically purchase energy on a fixed calendar may be unaware of certain risks. The fourth quarter of the year has extraordinary volatility, with pricing dependent on factors such as demand, economic activity, storage balances and weather. Often, prices are higher and customers lack the ability to wait for lower rates.
Firms that don’t manage energy on a strategic basis are unable to judge these market opportunities and consequently default to higher prices; even fewer firms employ people dedicated to continually evaluating the energy marketplace. Usource manages this review as an in-house resource, actively advising the customer about market direction and recommending precise energy procurement strategies.
Are there any issues worth considering that are particular to the pharmaceutical industry?
Since this industry has a relatively small number of large energy consumers, various energy supply aggregation programmes can be of significant financial benefit. These programmes group the energy requirements of multiple facilities in a manner that gives each location lower prices and better contract terms. Usource has successfully developed such aggregation programmes with many companies, including pharmaceutical companies such as Lonza.
On the natural gas side, multiple facility requirements can be effectively aggregated to reduce costs and employ the supplier in pooling operations to manage natural gas delivery risk. Commodity price risks can be managed from either a corporate or individual facility perspective. Usource often establishes risk targets with customers and then monitors the movement toward price objectives on a daily basis.
On the electricity side, multiple facility requirements should be aggregated to reduce cost through enhanced supply dynamics. Procurement programmes may include supply purchases that reflect fixed, variable and block pricing consistent with risk and pricing objectives. The level of corporate vs facility control in these risk management matters will vary by firm.
How can Usource help a customer in the pharmaceuticals industry achieve a better deal?
Usource helps all of its customers achieve exceptional energy deals through:
- dedicated, informed market monitoring
- broad solicitation of credible, qualified energy suppliers
- a bidding process that yields the best supplier prices the first time
- a collaborative evaluation of all the terms and conditions
- assistance in aligning the best energy deal with our customers’ business needs and energy requirements.
Most important, customer needs inevitably vary, especially in a highly competitive industry such as pharmaceuticals.
Usource listens carefully to understand those needs; for example, one facility may have a very stable load profile and may be best served by a fixed price contract. Another company may have a more flexible usage profile and can secure lower prices by buying electricity on an on-peak, offpeak basis. Usource works hard to understand customer and industry needs and collaborates to establish a viable, profitable procurement strategy.
How can companies with multiple facilities across different markets benefit from Usource’s offering?
Usource has researched and developed procurement strategies for a number of customers with facilities that involve many combinations of utilities, states and power pools. As one of the largest energy advisors in the US, Usource is able to design and leverage the best possible strategy for a multiple-location company. We routinely secure customer pricing that incorporates large volume discounts.
These, in turn, mean lower prices for each customer facility than if bid and priced on a stand-alone basis.
What is Usource’s involvement in the pharmaceuticals industry? How do you see this evolving?
Usource has provided services to the pharmaceutical industry since electricity markets opened in New England ten years ago. Today, Usource offers energy management and consulting services to a number of international firms. We typically begin service for a single pharmaceutical facility, demonstrate the benefits of our partnership, then add sister companies to the programme.
The best approach for a pharmaceutical client is to aggregate all of its business and energy requirements under an energy broker who can deliver the long-term strategy and the results that answer company objectives. This facility aggregation best ensures large volume discounts with maximum operational and risk management options.
Earlier this year, Usource entered a corporate agreement with Lonza, a large multinational pharmaceutical client. We agreed to provide energy management, consulting and brokerage services for the parent corporation in addition to each of Lonza’s US operating facilities. Usource has expanded its services to include a recent Lonza acquisition. As a result, Usource and Lonza are addressing a much larger energy supply programme that will benefit each company facility with enhanced production offerings and lower pricing.
Contracting for energy is not for the faint of heart. Energy costs comprise a significant portion of any facility’s annual budget. Usource’s unique process for securing first-and-best offers from a broad range of suppliers, along with continual monitoring of marketing pricing and conditions, and favourable contract terms bring a full time professional team and winning results to every energy customer.
Case study: Lonza USA
A 2011 agreement forged between Usource and Lonza highlights the benefits of proactive energy management in the global pharmaceutical industry. Lonza is one of the leading suppliers to the pharmaceutical, healthcare and life science industries, with thousands of employees and dozens of facilities worldwide. The company also operates a major biologics production facility in Portsmouth, New Hampshire, US, near Usource headquarters.
Discussions between companies quickly targeted potential cost savings and energy efficiencies for the Portsmouth site. More importantly, they led to a strategically (and geographically) integrated plan to manage Lonza USA’s national energy demand.
As a global leader in the production and support of active pharmaceutical ingredients, chemically and biotechnologically, Lonza requires reliable, predictable and cost-effective power for its production and research facilities. To achieve this, it needed a unified and strategic energy plan for its sites. Collaborating with Usource allowed Lonza’s managers to closely align energy demands, business and financial criteria, and strategic operating goals for its US operations.
Usource and Lonza crafted a sustainable strategy for energy management, supported by state-of-the-art information tools, highly informed consultation and expert 24/7 market analysis. Usource provided the following basic tools and services:
- a proprietary market tracking system with the latest energy market pricing
- monthly indicative electricity and natural gas basis prices
- a monthly natural gas commodity position report
- quarterly meetings with Lonza managers to review the market and purchasing strategy
- round-the-clock communications to assess favourable market opportunities and challenges
- a monthly market analysis and regulatory update newsletter
- regular review of the invoices from energy suppliers and/or utilities.
According to Bill Woodward, lead buyer technical equipment & services for Global Strategic Sourcing at the Lonza USA’s Walkersville, Maryland headquarters, the benefits of the Usource relationship have been measurable.
Now just one energy broker manages all the energy needs for Lonza USA sites, leveraging the volume of this demand to ensure financial benefits for the company, he says.
Bundling these power requirements and securing transparent, competitive bids from multiple energy suppliers help Lonza to control infrastructure costs and sustain competitive advantages. The unified energy procurement process, procedures and guidelines that Usource brings to Lonza, further optimises already high levels of synergy among Lonza USA’s sites, according to Woodward.
"Usource is a very professional, competent, and capable energy broker organisation," he says. "It has demonstrated the expertise and knowledge that provide Lonza with visibility of the energy marketplace and provide professional guidance and direction accordingly to the Lonza USA sites." In a volatile energy market, surrounded by a turbulent economy and increasingly competitive business environment, the Usource-Lonza partnership allows each company to do what it does best.