Energy procurement: Which method to choose?
The contrasting merits of the two main methods of energy procurement – reverse auctions, and tender and negotiation – are explained by NEIL GIFFORD, general manager SmartProcure services at Eutility.
Negotiating with energy retailers can seem to be a minefield for many, with so many choices to make – which energy retailer, what product, when is the right time to go to market and for how long should a retail contract be signed? When it comes to choosing the method of procurement, there are two main methods to consider, either the tender and negotiation process or using a reverse auction platform.
Both have their merits and, depending on your view or circumstances, one may provide better results than the other. They are both tools to ensure that the best price is achieved and in both cases results may vary.
Reverse auctions and online auction platforms are now a feature of modern day life. Most people are aware of online auction platforms, such as eBay, that provide online tools to participate in purchasing goods. Bids are placed from potential purchasers up to a predetermined time and the best offer submitted when the auction closes is locked into purchasing the goods. This process works by bidders offering increasingly higher prices to secure the goods or service.
The reverse auction platform employs specialised software that is managed by the consultants, with access given to the invited participants, in this case energy retailers. Site-specific information for each customer is displayed for each individual supply or group so that retailers can determine the load profiles and submit prices accordingly.
The online reverse auction (sometimes referred to as an e-auction platform) provides a similar service to an online auction, as the basic principle remains the same. The main differences are that selected energy retailers are invited to participate in the auction with a set time and date for the auction to take place. Energy retailers then log into the auction platform and place bids (typically over a 10-minute period). The offers are displayed to encourage the participants to offer better pricing and one clear winner is defined after the auction finishes. This process sees the bids reduce during the auction process.
From a customer perspective, they have the ability to log into the auction and watch the live bidding process, which provides transparency on the prices achieved. As part of the auction participation, energy retailers and customers are bound by the terms of the reverse auction program. Once the auction is complete, a report is forwarded to the client highlighting the top three bids. The customer then decides how they wish to proceed.
As with all methods of procurement, it does have its drawbacks. Some commentators believe that reverse auctions are more suited to buying certain commodities and services, and not necessarily commodities and services that are used and traded in segments of an hour. Setting a predetermined date and time may not take into consideration market movements and, therefore, may not achieve the best energy rates available.
This is essentially a computer-based transaction with little or no human intervention and this can be seen as a weakness, as it does not always provide the energy retailer with the option to negotiate around contract terms or to improve pricing after the auction window is closed.
TENDER AND NEGOTIATION
The other and most popular form of energy procurement is the tender and negotiation process. This method has been used for many years in energy markets (as well as other areas) and is well-suited to purchasing goods and services that are traded on a daily basis.
The tender and negotiation with energy retailers begins with the compiling of all the relevant data for each site. This is then sent to the selected retailers. The analyst dealing with the tender will email the individual retailers providing details of the sites or groups of customers to be included within the tender and invite them to provide their initial pricing on a given date. Energy retailers respond to the tender invitation knowing that they are in a competitive situation (providing their pricing blind) as they are not aware of other offers. This method of procurement means that they need to offer their best prices to stay in the negotiations as usually the top three retailers are selected for further negotiation.
The offers from the various energy retailers are then entered into a report that compares each of the offers on a like for like basis. This gives the analyst the opportunity to respond to the retailers over a period of days or weeks, depending on market conditions, to ensure that the best price is achieved for the customer.
This is a more hands-on approach and affords each of the parties involved the opportunity to contribute personally during the negotiation phase and revise their position and offers. Discussions with energy retailers provide the analysts with information on market conditions and movements, and how these changes may influence the decision-making process.
The tender report is then presented to the customer and the options are discussed, including contract duration, carbon pricing options, environmental charges, payment terms and any other factors that may be relevant to the customer. Once a decision is made, authorisation forms are signed and the contracts with the chosen energy retailer are prepared for signing.
This process can be lengthier than a reverse auction, as it can often involve input from all parties at various stages through the process and may not suit everyone. In addition, it is dependant on a quick response time from clients when it comes to signing the contract within the validity period of the contract offers, which can sometimes be as short as a few hours.
Both energy procurement methods have their merits and suit different people or organisations better than others. A client recently likened the difference to buying or selling a house – some people use the auction process, while others will prefer setting the price point and negotiating.