Posted by SJI Energy Advisors on Jul 1, 2020 3:26:00 PM
Q: Since any buyer can buy directly from any supplier, why use a broker?
A: Because the only way to get the best price is to create competition between and among suppliers – ideally every supplier – and that’s the broker’s job.
Commercial energy buyers need a process that ensures that they see every price available from every viable supplier, competing head-to-head. That is the only way to create real competition among suppliers.
In our region – Eastern Pennsylvania – energy deregulation is barely 7 years old, and effective energy procurement has been an iterative process:
Stage 1: Supplier Direct
This was the first fundamental shift – the buyer was no longer tied to the utility. The buyer could approach any supplier and buy directly from them.
An improvement? Certainly, but it didn’t create significant competition between suppliers.
Stage 2: Traditional Broker
In the wake of deregulation, thousands of “energy brokers” appeared almost overnight.
An improvement? Certainly, because a broker typically solicited prices from more than one supplier, but unfortunately, there were no barriers to entry: a company or an individual could represent themselves as a broker with no formal training and no official license, and these “brokers” typically worked with a very limited number of Suppliers, generating only minimal competition.
It is estimated that there are still more than 2,200 energy “brokers” in the Mid-Atlantic Region, comprising various levels of expertise and a broad range of ethics.
Stage 3: Online Reverse Auction
To address the obvious shortcomings of the traditional broker system, online, real-time reverse auctions emerged, pioneered by a company called World Energy.
An improvement? Certainly. There is no question that a reverse auction is the most powerful, effective way to generate competition among suppliers. Transparency increased; many more suppliers competed head-to-head; and the buyer could watch the auction unfold online, in real time. The principal drawback was time commitment. If the buyer wanted to explore all the options available (various term lengths; fixed vs. floating prices; green vs. brown power etc.) the process could take hours, which meant that the buyer and the supplier’s Pricing Desk were tied up for a good part of a day.
Stage 4: Two-Stage Direct-Bid Competition
The fourth iteration adopts the best aspects of the online, real-time reverse auction and eliminates the negatives. The Buyer sees:
- Every bid
- From every viable supplier
- Including every variation in contract type and length
This iteration is faster and easier – for both the buyer and the suppliers. It is a reverse auction in an abbreviated form – a two-stage direct-bid system, with every viable supplier competing. The entire process – from RFP to contract – requires about two hours of the buyer’s time from start to finish.
Has Your Broker Evolved?
Here’s what you should expect from your energy broker/consultant:
- Market Mastery. Of all the factors that affect energy pricing, none is more important than timing. Does your broker follow the market every day? Does he have the intellect and experience to understand the complex factors that are driving the market? Does he use this understanding to minimize your risk and maximize your opportunities?
- Effective RFP’s. Prior to pricing, expect your Broker to spend up to an hour with you, on the phone or face-to-face, discussing your energy strategy and concerns. Expect the broker to craft an RFP that explains all your requirements to the suppliers clearly and succinctly, e.g., multiple term lengths, green-power; and pass-through of capacity and transmission charges. If it’s a gas contract, what swing rates (bandwidth) do you want to explore and what are the terms for buying/selling overage/underage?
- Effective Supplier Management. In the Mid-Atlantic region, you should expect your broker to be dealing on a regular basis with more than 30 different suppliers. Since not all suppliers will want to bid on every contract, expect your broker to know which are viable for your RFP. New suppliers entering the market are often bid aggressively to capture market share. Typically, you should expect bids from 12-15 suppliers for electricity, and about half that number for natural gas.
- Effective Client Interaction. Once the bids are in, you should be presented with every bid on every variable, followed by a concise summary of your best options.
- Two Bidding Rounds. You will use the first round of bidding to narrow your options, then the second round allows those suppliers with the best bids to re-bid and submit executable contracts – ready for your signature if you’re satisfied with the result..
- Contracting Expertise. This step – often overlooked – can be critical. Every supplier has a different contract, and an experienced broker can help you avoid the pitfalls hidden in the contract language.
- Valuing Your Time. With the contracting complete, you should have spent no more than two hours on this process:
Perhaps the most important outcome of an effective procurement process is confidence:
- Confidence that you have seen every price available
- Confidence that you have chosen the best price for your energy strategy
- Confidence that your contracts are free of pitfalls and unpleasant surprises.
And the best way to achieve this outcome is by choosing a broker with the best process.