What is retail energy?
Traditionally, consumers had only one option for purchasing their electricity and natural gas: the local utility company. In the 1980s and 1990s, the Federal Energy Regulatory Commission (FERC) allowed states to restructure or “deregulate” their energy markets. Deregulation allows customers to negotiate directly with gas and electricity suppliers, regardless of who owns the pipelines and transmission lines to transport that gas and electricity. The FERC website provides more information on the history of deregulation.
In deregulated states, utilities still own, operate, and maintain the transportation infrastructure, but customers can choose to buy from third-party “retail” energy suppliers. Customers that do not purchase retail power automatically receive “default service,” which means their utilities purchase energy on their behalf.
Retail Energy Buyer, the new weekly email newsletter from Energy Manager Today, is aimed at businesses that purchase retail energy, or are considering doing so.
While there is an abundance of information targeted at retail suppliers, relatively little is targeted to buyers. This newsletter seeks to fill that gap by providing relevant news, columns and analysis. This, our first column, provides an overview of key considerations and best practices for buying retail electricity and gas. Future columns will explore specific issues in greater detail. We hope you’ll keep tuned-in.
While some retail energy purchasing strategies are quite complex, others are very straightforward. Large businesses, especially those with energy-intensive industrial operations, can benefit greatly by developing sophisticated purchasing strategies. These are often part of broader energy management strategies that involve implementing energy efficiency measures, modifying operations to reduce demand or time-of-use charges, participating in demand response programs, storing gas on site, developing on-site generation, and other approaches to minimize energy expense.
Smaller businesses, especially commercial operations with low to moderate energy needs, still stand to gain from buying retail energy. However, they may prefer simpler strategies and streamlined approaches that may require less analysis and ongoing monitoring, especially if they are new to retail energy markets.
Large or small, transparency is key to any power supply agreement.
Fixed, variable, or blended pricing
Fixed pricing means locking in a specified price for a period of time. Variable pricing means the price will fluctuate based on market factors (primarily the cost of fuel). Some variable-priced contracts have a cap. Blended pricing means that a portion of the price is fixed and a portion is variable. Fixed pricing typically carries a small price premium, as The Energy Professionals Association explains.
Whether you prefer a fixed or variable price depends in part on your risk tolerance. If electricity and/or gas constitutes a large percentage of your budget, you may want to fix your price to limit your risk. If not, then you may prefer a variable price that allows you to avoid the price premium.
Some buyers may also want to make predictions about the direction of the market in the coming months or years. If you believe that market prices are likely to decrease, a variable price allows you to take advantage of falling prices. If you believe prices are more likely to rise, a fixed price allows you to mitigate your risk.
Contract duration and renewal
Contract lengths often range from 1 to 3 years – though contracts as short as 6 months are also common. The American Coalition of Competitive Energy Suppliers (ACCES) suggests buyers should understand the terms and timeframe for renewing or terminating the agreement and any associated fees. One advantage of a longer term contract is that, administratively, it requires less of your time since you can wait longer before repeating the procurement process. ACCES also recommends that you understand the billing process and availability of customer service.
Additional energy services
Many vendors provide additional services beyond electricity and gas supply. Common services include:
- Energy efficiency
- Demand response
- Green power and on-site generation
Advisers & buyers’ agents
Many companies provide third-party advisory services to help buyers get the best possible deal on their energy. For example, if you are a first-time buyer, a broker can help facilitate the procurement process by offering a request for proposal template to help solicit transparent bids and determine which offer best meets your needs.
Advisers who make a living studying energy markets might also provide insight into market shifts to help you decide whether to choose a fixed or variable-price contract, determine your contract’s duration, and help you negotiate more favorable contract terms. Likewise, they may be able to help you identify additional opportunities to help cut your energy expenses. Although there is a fee for these services, for some companies, the value they provide can justify this cost.
Thank you for reading our first edition of Retail Energy Buyer. We hope you enjoyed it. Future editions will take deeper dives into purchasing considerations, introduce resources and training available to energy buyers, provide market updates, provide case studies of organizations that successfully cut their energy costs, and discuss other topics of interest.
Please take a moment and forward this newsletter to one or more colleagues.