Buying Power Bringing Big-Business Electricity Choices to Small and Mid-size Businesses
Buying Power 1 Executive Summary Electricity buying pools are an increasingly popular option for small and mid-size businesses seeking greater control of their electricity costs, particularly in volatile energy markets. This white paper provides a primer for businesses that are considering joining an electricity buying pool. You will learn about the basic concepts behind pricing for pool members, the characteristics of success and considerations for selecting a pool program. Introduction Health insurance. Wholesale clubs. Retirement plans. Small and mid-size businesses have long understood the power of banding together and gaining strength in numbers to address the basic costs of doing business. The ability to save money on operational essentials can directly affect your opportunities to survive and grow. Similar to other programs that leverage a group s collective purchasing power, electricity buying pools provide an opportunity to trim energy costs by working in conjunction with other like-sized businesses. An energy supplier will work with members of the buying pool to take their collective electricity load to the wholesale market, with the intent of securing better pricing for each pool participant than what they might obtain if they were seeking pricing for their individual load. Energy Buying Pools: The Basics Aggregation is the term sometimes used to describe the process by which individual electricity users form an alliance for energy purchases to leverage the buying power of the group s aggregate load. In a buying pool, companies band together to combine each of their smaller energy purchases (i.e. their loads) into a single larger load. The most competitive electricity rates are available through purchases in the wholesale market but because wholesale electricity is sold in large blocks, only businesses with large electricity loads/ requirements can typically take advantage of the value offered by these large-scale purchases. The Minimum Quantities To take advantage of wholesale market purchases, a business or multi-facility enterprise must have peak demand of 1 megawatt (MW) or greater. Because most businesses, institutions and small manufacturing facilities typically use less than this, the opportunity to make wholesale market purchases is a challenge if not an impossibility. However, by joining a buying pool, smaller businesses have the opportunity to take advantage of larger wholesale purchases that, when broken down by pool participants, may yield a lower rate than what is available to a small business seeking electricity supply pricing on its own.
Buying Power 2 The Pool Mix Most buying pools will include a group of 30-200 customers. This group may be comprised of companies from a mix of industries or a single industry. These pools are created and managed by an aggregator or energy supplier (depending on the rules in the region) that creates the energy-buying alliance, seeks out competitive pricing, executes the electricity purchase in the wholesale market, and secures the contracts and rates for all pool participants. How Wholesale Market Purchases and Buying Pool Contracts Are Structured Unlike the rate structures that a small or mid-size business may receive as an individual consumer, the rates and contract terms for buying pools are structured for the collective group. The required load is purchased on the group s behalf by a supplier that is licensed to buy in the wholesale electricity market. Like the stock market, the wholesale electricity market changes constantly. Factors such as weather, supply and demand, political events, industry events, and regulatory changes can affect pricing from hour to hour and day to day as well as for particular terms (like 12 months versus 24 months). Retail suppliers working in the wholesale market closely monitor market conditions and can help identify opportunities to buy when pricing and terms are most advantageous or provide a heads-up when pressures on the market may cause prices to rise substantially or for sustained periods of time. Many institutions and commercial businesses are accustomed to securing electricity service from their local utility. The utility company establishes rates based on its costs, desired profit margins and regulatory requirements or allowances and it may change those rates periodically in accordance with regulations that govern its service area. As such, organizations purchasing their electricity supply from their utility are charged for usage at the utility s pre-established rate, with no opportunity to negotiate or take advantage of pricing dips in the wholesale electricity market. Conversely, businesses working with retail energy suppliers in deregulated markets may have access to more product choices (i.e. pricing options) for their required load including those offered through an energy buying pool. Pool Product Options Fixed Price An energy buying pool may choose to purchase its entire load at a fixed price, meaning that each pool member s electricity supply rate is fixed for a prescribed time. Business owners that choose a fixed-price strategy may do so because they prefer predictability in their energy charges and have a low risk tolerance for price fluctuations. This type of strategy would not provide the opportunity to secure lower rates that may become available over time in the wholesale market, once the fixed price purchase is made. In a fixed price scenario, the energy supplier s objective is to secure the pool s load at a rate lower than the rate that is available to each pool member if they were purchasing supply on an individual business. Index Priced Another product option is market-based or index pricing. This option is best suited for a pool that is comfortable with taking on more risk, with the objective of achieving lower energy costs over time. Initially, no portion of the buying pool s load is locked in, so the energy supplier s objective is to closely monitor the market, like a stock broker, and inform pool participants or the pool manager of market conditions and forecasts. If market factors are showing the distinct possibility of sustained price increases beyond the pool s risk tolerance, pool members may decide to convert to a fixed price product before they are exposed to possible increases. Otherwise, they may float the market and capitalize on favorable market conditions. Retail suppliers are able to closely monitor wholesale market conditions and identify opportunities, as well as potential changes, that may impact the pool s buying strategy.
Buying Power 3 Hybrid Product Based on the collective needs of the pool, the supplier for the pool may recommend a portfolio-style structure for the group s purchasing plan, which combines fixed-price certainty with market-priced opportunities. This type of strategy involves purchasing a portion of the group s required energy supply at a fixed price at the beginning of the contract term or when conditions are favorable throughout the term and any load that is not locked in at a fixed price will float at market rates until other fixed price purchases are executed. Throughout the contract term, your supplier watches the market to identify opportunities and execute additional fixed price Buying pools are available in many deregulated electricity markets. purchases when market rates meet the pool s load and budget requirements. This approach can result in a series of fixed price purchases executed at different points in time with any unhedged load floating at market rates. Cooperative Action: An Essential for Buying Pool Success Buying pools are available in many deregulated electricity markets. Most often, pools are formed around an existing organization, such as school district coalitions, chambers of commerce, trade organizations, or other regional business consortiums. In other cases, a group of businesses may have no pre-existing relationship but may share the same geographic location. A consultant or other third party may recruit businesses within the same service area for pool participation, with a focus on achieving a mix of businesses that yield a competitive load shape. Electricity buying pools begin with a group of interested businesses and a commitment to the goal of controlling electricity costs. How the Pool is Built Similar to group insurance or retirement plans, the energy supplier and any sponsoring organization (i.e. association or chamber of commerce) will typically establish an open enrollment period for 30 to 60 days. During this time, prospective pool members should have the opportunity to learn about the supplier and their purchasing choices/contract terms, as well as information about regulations, choices and rate trends in their service area. During this time, the energy supplier will also gather recent copies of electricity bills from each interested participant. This billing data will give the supplier an understanding of the collective load profile and the average rates each member is paying on their own. The supplier may also conduct credit checks of each business to protect the viability of the entire pool. At a pre-determined date, the enrollment period closes and the supplier should communicate the target rate or price-to-beat to the pool members. Collectively, the supplier and the pool members will reach an agreement on the goals for the pool contract. The cooperative actions of the supplier and prospective pool participants during this phase are critical to the success of the pool. The supplier will enter the purchasing period with assumptions based on the load requirements of the group, so if prospective pool members abandon their commitment, pricing for the entire pool can be adversely affected.
Buying Power 4 Using the target rate as a guide, the supplier will require a set timeframe to identify competitive pricing in the wholesale market. Based on purchasing opportunities, the supplier will provide pool participants with a proposed contract structure. Because market conditions can change rapidly, the supplier and pool members should be positioned to work in concert to efficiently secure and execute the terms proposed in the contract. As described above, the contract rates and terms are made possible by the collective load shape. To successfully secure the proposed rates, each pool member must support the group s cooperative efforts in contract processing. The supplier s proposed rates for pool participants are not secure until all contracts are executed and a failure to execute each contract in a timely manner can result in a missed opportunity and the need to restart the purchasing process. Evaluating an Energy Supplier for Your Pool When joining an energy buying pool, you re exercising your right to choose your energy supplier. As with any significant business investment, it s well worth the time to research your options, understand the qualifications of any potential supplier and make your purchasing decision with confidence. The following questions can help you and other pool members evaluate supplier qualifications. What is the supplier s level of experience? The pool s ability to save money and control costs is largely based on the strategic decisions of the supplier (and anyone making decisions on behalf of the pool members). The supplier s strategy should be based on an understanding of the regulations that apply to your service area and their level of experience executing purchases in the wholesale markets. Your evaluation questions may include: How long have you been in business? How long have you been managing and executing purchases for buying pools? How many pools are you currently running? How many businesses are participating in these pools? Who will my contact person be and where are they located? What products do they offer? As described on page 2, a buying pool should give smaller businesses access to products that unlock more competitive pricing. Your evaluation questions should give you an understanding of the available range of products. Suppiers offering only a fixed price product to their buying pool members may provide fewer alternatives for cost savings, and may provide less market monitoring for members. What is the process for distributing and managing contracts? This paper describes the time-sensitive nature of processing contracts. The commitment of pool participants is essential to success and their commitment must be matched by the supplier s ability to process the group s contracts efficiently. The following evaluation questions can help you understand a supplier s ability to manage this process efficiently. How will you distribute contracts to our members? Who will answer member questions throughout the contract negotiation process? Who is responsible for notifying us of contract renewal opportunities, and how much time will we have to consider our renewal options?
Superior, dedicated customer service should be part of your energy pool package, both before and after you sign a contract. How will my account be serviced? Superior, dedicated customer service should be part of your energy pool package, both before and after you sign a contract. These evaluation questions can help you understand the level of service you can expect to receive from a supplier. Where will I direct questions or concerns about my bill? Will you communicate changes in market or regulatory conditions, energy trends or other information that may affect my energy rate or monthly bill? If so, how frequently and how will that information be communicated? What other services can I expect throughout the term of my contract? Can we speak to references/current pool customers? Conclusion In today s business climate, small and mid-size businesses are constantly being challenged to control the basic costs of doing business. Energy buying pools can provide a big-business electricity supply solution to smaller energy consumers. With better knowledge of your electricity purchasing choices, a qualified energy supplier to work with, and a shared commitment to success, small and mid-size businesses can work cooperatively to tap into the true benefits of the deregulated electricity market: pricing choices. About Direct Energy Business Direct Energy Business is part of the largest retail energy supplier in North America and a champion in serving businesses diverse energy needs. Our leadership position, deep expertise and commitment to addressing our customers unique energy demands is how we earn the trust of our customers and help to make their businesses better. With more than 25 years of industry experience, we are dedicated to helping companies make smart energy choices for their business. Contact us today to discuss your energy needs and we ll help you navigate the opportunities available to your service location(s). Learn more about Direct Energy Business and other energy strategies for businesses and organizations of all types by visiting business.directenergy.com or call 888.925.9115. Copyright 2014 Direct Energy Business. Direct Energy and the Energy Bolt Design are either registered trademarks or trademarks of Direct Energy Marketing Limited in the United States and/or Canada used under license. District of Columbia License No. EA-04-4-4. Maryland License Nos. IR-437; IR-719; IR-791. Texas PUCT Cert. No. 10011. 888.925.9115 business.directenergy.com DEB 00248 (14)