Scott Wooldridge | Sep 21, 2016
Do Energy Consultants and Advisors provide an improved commercial outcome when used to procure electricity and gas energy supply contracts?
This article was originally published on LinkedIn by Energy Action CEO Scott Wooldridge.
Here's a general overview of the effects of Consultants and Advisors:
For Commercial and Industrial businesses in Australia the average Energy Retail margin has been squeezed significantly by the competitive tension Energy Consultants or Advisors drive. For clients that participate in an Energy Auction on the Australian Energy Exchange (AEX), clients see an average energy price reduction of 6.5% from first bid to last bid. In the last couple of month’s ERM Power, who focus solely on this sector announced it is making $3 MWh (around 6% margin) and AGL significantly reduced its Business Sales team due to tight margins.
In short, yes, Consultants and Advisors drive a highly competitive outcome for their clients.
So how do you know if you have an effective Consultant or Advisor? In Australia there are over 150 companies offering Procurement Services for Electricity and Gas. The Consultant and Advisor industry for energy is not regulated, effectively anyone can put up a shingle and start a business offering Procurement Services. What does this mean? The quality of service and outcomes varies drastically. If it were my business, there are only a small handful of organisations I would consider in Australia to use to obtain an energy contract on my behalf.
My background was more on the engineering and demand side of Energy and Controls Infrastructure, due to certification and regulations, it was relatively easy to determine who was and wasn’t qualified for the job. It’s a lot tougher on the supply side as I’ve discovered over the last two years, so here’s a list of the top 9 questions I’d ask before engaging a Procurement Services Provider.
● Does the company you are working with have an AFSL (Australian Financial Services License)?
No? You are off to a bad start, Advisors with an AFSL are required to meet very high standards of conduct and must always keep their Clients best interests on every recommendation. Whether you need AFSL style services or not, you can take comfort that the licenced status requires service and advice of the highest standard and for many types of energy advice having an AFSL is a legal requirement.
● Does your Advisor or Consultant have a formal partnership with at least 15 Energy Retailers?
There are over 30 registered Energy Retailers in Australia and around 18 actively providing prices and contracts. Many Advisors and Consultants only work with 3-4 Energy Retailers so you are not truly testing the market for the best pricing available. No Advisor or Consultant works with every Energy Retailer and a number who have claimed this have been subject to ACCC fines. Ask for a written list of the Energy Retailers that the Advisor or Consultant has a marketing or sales contract with, if it is not at least 15 then you are limiting your options.
● So you get an electricity price and the c\KWh or $\MWh rate looks too good to be true….
If you have a Consultant or Advisor who talks to you only around the Energy Rates watch out! 50% of your electricity or gas bill is payment for the network infrastructure (poles, wires and pipes), this cannot be competitively auctioned or tendered, it is a regulated fee. The remaining components including retailer fees and environmental charges can be negotiated. You need to understand what the total of the energy rates, environmental charges and retailer charges add up to and understand if they are fixed or variable! It is common practise amongst some Energy Retailers to quote a low c\KWh rate however hide charges and margin in other components of the Energy Contract. Chances are that rate was too good to be true…
● Tenders versus Auctions versus Wholesale Products… what gets a better result?
These are the 3 common approaches Consultants and Advisors use to obtain a competitive commercial outcome for their clients. The reality is that each method has its place and they are all valid dependant on your energy spend, how you sign and negotiate contracts and your risk profile. Rather than make it a war of methodologies, find an organisation that offers all of these approaches and then have the conversation as to what is a better fit for your organisation.
● Are prices going up or down? What is the market guidance?
No one has a crystal ball, the markets are volatile and change quickly so if anyone guarantees prices will rise or fall in the future run fast…. A good Consultant or Advisor should be able however to provide detailed market guidance, showing the Retail Pricing trends and provide detailed explanations as to what dynamics are driving the prices up or down. They should also be able to provide rational guidance as to the term you should sign your Energy Contract for. Pay attention! This guidance is the expertise you are paying for and you should take it seriously.
As a side note, don’t be fooled by wholesale price trends, you are buying Retail not Wholesale energy. Wholesale trends are a broad indication of market dynamics that anyone can download, ask for a Retail price trend, this is what you are actually paying in the Retail markets.
● Contractual terms and conditions
Do I care what I am signing? You should, Energy Contracts have a variety of commercial clauses that include termination fees and take or pay clauses (if you don’t use the Energy you still pay or if you use above your contracted amount you pay significantly higher rates). Find out if your Consultant or Advisor has a Contracts Management or Legal function that actually reviews the Energy contract they are asking you to sign on your behalf. This is the other key area Energy Retailers look to recover margin
● Large Consultant or Advisor versus small Consultant or Advisor, does it matter?
A better question would be how many Procurement Events does the company you are looking to engage with conduct a year? The Energy Market is highly dynamic, Energy Retailers are entering and leaving the market at unprecedented rates and pricing models and practises are changing daily. If the Consultant or Advisor is not pricing in the market on a regular basis then you and they are likely to be caught out by the market changes. Look for companies conducting over 100 Procurement Events per year, Energy Action as an example conducts over 2200 Procurement Events per year.
● Where Size does Matter….
If your spend on Energy is significant or you have a complex portfolio of sites across a number of states or territories then you need to engage with an organisation with bandwidth. To manage a significant contracting load in a timely manner takes resources, both in consolidating and presenting accurate energy consumption data, undertaking multiple procurement events (at least one per state) and managing the work flow associated with contracts, at times one per each individual site. You cannot afford delays as existing contracts have expiry dates and the energy market price points moves on a daily basis.
● Insured or not?
You’re paying for a Professional Service, it is worth making sure the company you are working with has at least $20m in Public Liability and Professional Indemnity Insurance.
And two big don’ts
Firstly, credible Energy Consultants and Advisors are Professional Services organisations that have significant market knowledge and IP around the local and global energy markets. Show them respect and do not engage multiple Advisors or Consultants at the same time or approach a retailer directly and try and avoid any fees after the fact from a Procurement Exercise. Why? Other than good business ethics, this is the way to get the best commercial outcome, an Energy Retailer will only provide their best offer if they believe a contract will be executed. This is achieved by a single Procurement event where it is clear to the Energy Retailer that this is their only opportunity to win your business.
Secondly, if you are getting your procurement team to go to market to find an Advisor to go to market to find an Energy Retailer to manage the market, think closely about the reason you wanted an Advisor in the first place. The relationship is about trust, knowledge and expertise. I have lost count of the times I have seen a procurement exercise run to select an Advisor that takes months to complete and at the end of the day saves $5k to $10k from a procurement services budget. In that time the energy supply market price has moved 10% - 15% and in real terms has costed clients $1.5m+ in additional annual energy charges. In Energy markets a quick decision is a good decision for all participants!
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