Introduction
Once bitten, twice shy—that’s the way many managers feel about engaging with an energy broker. They’ve ended up paying too much, entered into long-term arrangements without knowing it, or have been suckered by the fine print.
So how do you know whether your energy broker is offering you the best deal, or is just on a mission for commission?
Understand the commission structure
First, let’s understand the nature of the relationship. A broker is an arranger. They bring buyer and seller together and make a deal happen. Their knowledge of the market is usually excellent, which is why you approach them to help with your energy procurement.
On your behalf, the broker negotiates a price with the energy supplier. They also discuss the commissions they will be paid. And at the end of the negotiations, they make recommendations to you, their customer. What you don’t have access to is how they reached those conclusions. Was it because the supplier was offering you the best deal, or promising the broker the best commission?
The only way to find out is to ask your broker to declare the commission they will receive for each offer. If they refuse to share the information, you probably should ask yourself why.
The difference between controllable and non-controllable costs
The way a business is charged for electricity in Australia is different from the way households are billed. First, there’s the energy charge—for which the company pays at a contracted or default rate—the latter means the existing contract has expired and the business is paying through the nose for energy. Second, there’s the demand charge, which represents the maximum amount of electricity the business is likely to draw from the grid in any 30-minute window. It allows the network to ensure power is available whenever it is required.
Put like that, it’s probably all a little confusing. To help you understand, let’s talk jelly beans instead! Imagine that you have a tendency to reach for jelly beans at times of great stress. You have a jar on your desk that is chock full of them. In this example, you pay for the total number of jelly beans you eat (energy charge), but you also pay to make sure there are always enough jelly beans in that jar to cover the most stressful period of the month (demand charge)—perhaps the half-hour before the board meeting each month—because the last thing you want to feel at the moment of greatest stress is glass.
Sadly, a broker is unlikely to talk jelly beans. They’ll refer to commodity costs—the energy price—and non-commodity costs—network charges, environmental certificates, demand charges and market participation charges. All you need to know is that the energy price represents the cost you pay the retailer for each jelly bean. The other values are largely uncontrollable. Some, like energy and demand charges, are related to network costs. Others, like environmental certificates, relate to keeping the planet—rather than the jelly beans—green.
Tariffs and demand charges should be reviewed regularly.
Your broker will more than likely propose you enter into a contract with a retailer for a period of time. It provides certainty on both sides and is typically cheaper than a deal with no term. It’s likely there will be the opportunity to fix an energy price or let it roll with the market. Which is best depends on the market and the business’ appetite for risk.
Let’s go back to jelly beans for a second—perhaps even a third, especially if it’s one of our favorites. In a fixed price contract, you’ll pay the same amount for the delivery of jelly beans—adjusted to reflect the different times of day you usually eat them—for the entire period of the contract. That way, there will be few surprises when your monthly jelly-bean bill arrives—though this may be stretching the analogy a little too far. The alternative is to pay the going rate for those precious stress relievers. It could end up costing you more but, equally, it could end up costing you less.
In Australia, it is the network that sets the demand charges. How often they are adjusted depends on the network. In some cases, a single 30-minute window could end up setting your demand charge for the entire year. Imagine the following scenario; there’s an especially stressful board meeting about to happen. You know your reports on energy costs are going to be challenged. You reach for your trusty jar even more often than usual … and that single moment of weakness impacts how much you’ll be charged for the whole of the next year.
The more often these charges are reviewed, then, the more control you have over energy costs.
Brokers can forward contracts
The time to negotiate a new energy contract isn’t the day after the existing one expires. Wait till then, and you could end up paying default rates. These rates don’t include any discounts and are much higher than any negotiated rate. At these kinds of rates, your jelly bean addiction will be noticed very quickly by the finance team.
Fortunately, a broker can enter into negotiations with a retailer at any point during an existing contract and agree a ‘future’ contract to start when the current one expires.
Late RFPs result in mismanaged meters
Agreeing on a new contract at the last minute, especially with a new provider, is fraught with risk. If the meter is not transferred to the new retailer in time, those pricey default rates kick in. Remember, a final meter read is required before a transfer can take place; otherwise, the retailer has no way of knowing how much to bill you. In the energy industry, it’s not possible—without some kind of error—for two different companies to deliver you jelly beans. They might think they did, but one of them is wrong.
Load variance clauses and influence over generation assets
To be able to sell energy, a retailer must first buy it on the wholesale market. Unlike gas—or jelly beans—electricity isn’t something that can be readily stored, so they need to know exactly how much to buy. Typically, when entering into a contract with a large business, they agree to supply a certain amount, which is then stipulated in the contract.
The amount of energy your organization predicts it will use, therefore, also influences how much is generated in the market. Getting it wrong causes oversupply or, worse, power cuts.
Under and over-usage cause problems for the retailer. Use too little, and the retailer is left holding the baby. Use too much, and the retailer has to buy more on the spot market, which could cost many times more than their regular, hedged purchases. Hence, there’s a good chance you’ll incur penalties.
A load variance clause represents the leeway—above and below—that a retailer will allow.
Retailers price by ABN, unless…
Typically, retailers negotiate energy prices individually with businesses, rather than have set prices. Hence the value in a good broker. The price is not driven just by volume; it is influenced by market conditions and load profile.
Not all companies have the purchasing power that Fortune 500 companies might have in the market. To counter this, they can aggregate with other groups to sign power purchase agreements (PPA). Coming together increases the buying power and therefore the potential for discounts. Typically, this describes bulk purchases of renewable energy.
Forecasting, of course, plays a significant role in negotiating business energy prices. For that, data is an essential part of energy procurement best practice. Yet few brokers have access to the kind of analysis power needed to crunch the numbers properly.
