Energy Buyers Benefit from Competition among Suppliers

May 2013

• Many energy buyers do not structure their energy buying process to take advantage of competitive forces.
• To benefit from competition, energy buyers have to develop a supplier portfolio by entering into energy purchase contracts with 3 or more energy suppliers.
• It takes an investment of time and perhaps legal costs to develop a portfolio of enabling contracts with quality suppliers. But the numbers show it is a simple strategy that consistently delivers energy cost savings.

As buyers of goods and services, each of us knows that when sellers have to compete for our business, we get a better price. The same holds true when buying energy. Yet many energy buyers do not structure their energy buying process to take advantage of competitive forces, perhaps because they are unsure of how to do so. But structuring energy purchasing this way is a simple and proven way to save thousands of dollars a year.

To benefit from competition among suppliers, energy buyers have to develop a supplier portfolio by entering into energy purchase contracts with 3 or more energy suppliers. Wholesale energy purchase contracts typically do not obligate the parties to enter into a transaction, they merely specify the general terms and conditions that will apply IF a specific transaction is completed in the future.  We sometimes refer to these as “enabling agreements” as they enable future transactions. All the parties need to do to complete a purchase at a future time is agree on volume, delivery dates, delivery location and, of course, price.

By taking the time to negotiate enabling agreements with 3 or more suppliers, the buyer is then in a position to canvass them all for a price any time a transaction is contemplated. The supplier with the lowest price for a given volume, delivery term and delivery location gets the business. Usually, prices can be obtained from all 3 suppliers and a deal completed in a matter of minutes.

Aegent Energy Advisors completes more than 1,000 gas purchase transactions a year, acting as agent to buy gas on behalf of our clients. For each transaction, Aegent records the prices offered by all of the competing suppliers. This gives us a wealth of information to analyse about the price competitiveness of different suppliers, and about price competition at different delivery points. Some interesting observations emerge.

It is clear that no single supplier always has the lowest price. The one with the lowest offer today may be the highest next week. Consistently saving money requires that the buyer is able to go to the supplier offering the best price on the day the buyer wants to buy.

Review of the data shows that savings of 5-10 cents per GJ are quite common using this purchasing method (we measure these savings conservatively by taking the difference between the lowest offer and the average of all the offers). For an energy buyer with requirements for 1000 GJ/d of gas supply, this method can save $18,000 to $36,000 per year.

Price competition is strongest at the very liquid trading points, but there are significant price differences among suppliers at the less traded delivery points. At the Dawn trading point in 2012, the price difference among suppliers was generally less than 2 cents per GJ. In contrast, for buyers at Parkway the average spread was 4.5 cents, and in Union’s Eastern Delivery Area (eastern Ontario) price differences as high as 15 cents per GJ were seen.  Thus, the value of the strategy is greater the less liquid the trading point.

It is worth noting that the suppliers to Aegent’s clients know they are in competition, and we believe this motivates them to sharpen their prices. They know they are in competition because they don’t get the business every time! When Aegent takes on a new client with a single supplier, we often see a period where that incumbent supplier’s price competitiveness slowly improves over time, as they come to realize they are now in competition. They realize they have to be sharper in pricing now to get the business they previously took for granted.

While we have not found a single supplier that always has the lowest price, the price data clearly shows that some suppliers are more competitive than others.  A supplier may be very competitive at Dawn, but much less competitive at other sales points like Enbridge CDA or Union EDA. Some suppliers have assets or capabilities that enable them to be more competitive at certain points, and it reflects in their offer prices. This is good information to have when a buyer is expanding their portfolio to add new suppliers. It’s best to add the ones who have shown themselves to be competitive at the point where the buyer needs to buy.

It takes an investment of time and perhaps legal costs to develop a portfolio of enabling contracts with quality suppliers. But the numbers show it is a simple strategy that consistently delivers energy cost savings. It is a strategy buyers use intuitively in other purchases – time to put it to work in energy buying too.

Liquidity and Its Practical Importance to Energy Buyers Read more »