How Ingrained Behaviors Can Lead to Unnecessary Energy Costs

Human beings are creatures of habit. It’s in our nature to follow familiar behaviors and beliefs–even when these things may lead to poor outcomes. We are conditioned to repeat unhealthy behaviors or hold on to outdated beliefs simply because they are familiar to us, and familiarity feels comfortable and safe. But familiarity doesn’t always equal productivity or enable positive outcomes. If we want our lives, careers, and organizations to evolve, our beliefs and behaviors must evolve as well.

Luckily, we humans also have free will. We can learn new skills and adapt to changing environments if we choose to. We can break unproductive habits and alter restricting beliefs. We can let go of what no longer serves to make way for emerging information, technologies, resources, and habits that help us achieve our goals and realize our dreams.

You may be wondering what all this has to do with your energy costs. The fact is, the habits you’ve formed and the decisions you make in your professional life can greatly impact your organization’s energy outcomes. With a volatile and ever-changing energy market, relying on the familiar by renewing the same energy contract with a “set it and forget it” approach could result in costly repercussions.

Here are some common ways that ingrained behaviors can impact your energy costs.

Mean Reversion

Mean reversion (or reversion to the mean) is a financial concept that says, when costs fluctuate higher or lower than the long-term norm, they will ultimately return to their expected, long-understood state. The data demonstrate that price performance will almost always revert to the mean. Here’s how this plays out in your energy contract. When energy pricing falls well below the historical average, and you have a “set it and forget it” approach, you are not compelled to make a move and lock in the lower pricing. This can result in a missed opportunity for savings because it is likely that prices will rise back to the mean.

Loss Aversion

Loss aversion is an ingrained behavior where we are so fearful of a loss that we focus more on avoiding the loss than we do on making gains. When we put more value on a potential loss, this may cause us to miss an opportunity to gain. This comes into play in energy procurement when energy prices drop, and we do not take advantage of lower prices because we believe that prices will go even lower, so we hesitate to act. Rather than seeing the opportunity to save (gain), we fear acting too soon and “losing” more savings because we think pricing will continue to drop. This also works relative to an organization’s budget. If prices are up over the amount we have budgeted, then we may wait to see if the prices will drop so we don’t “lock in a loss”. That unfavorable budget variance can be painful, so we may ignore market fundamentals in the hope of recovering ground.

Anchoring

We can also become fixated on a particular price which stifles our ability to seize opportunities. For example, you may be focusing on your last contract price, a budget target, a price someone else may have locked in. We all do it; we anchor to a number and lose the flexibility to make positive changes. If our new contract price is 50% higher than our last contract price, we are inclined to wait and hope that the price comes back down. We may discount the fundamentals that led to the price increase.

How Usource can help you avoid these decision-making pitfalls

Usource can help you stay focused on the fundamentals in the marketplace and avoid gut decisions when data-driven insights would serve you better. Our process is grounded in a deep understanding of supply and demand drivers in commercial energy markets. We utilize data and analytics to help you think more objectively and make fact-based decisions regarding commercial and industrial energy procurement. We take the time to understand your unique business needs and craft a procurement plan that meets your budget and risk management objectives. Once we help you craft a unique energy strategy, we continue to remain engaged with you and your team–alerting you to market trends and future opportunities.

Contact us for a free energy analysis and to discuss your energy and sustainability goals.

 

energy cost managementenergy cost reductionenergy strategy

About the author

Tom Dyer

Tom is the Senior Director of Procurement and Analysis for Usource. Tom has extensive experience in energy markets, developing and implementing unique solutions and innovative energy strategies, for some of the nation’s largest energy users across a variety of sectors and geography.

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