Better Than Ever: Why Online Energy Auctions Make Every Dollar CountMay 27, 2020
By Paul Shagawat, Co-Founder and Managing Partner, Transparent Energy
As business leaders look for ways to cut costs and protect payrolls during the COVID-19 pandemic – being called upon once again to “do more with less” – they are finding a strategic ally in online energy auctions. With retail natural gas and power (i.e., electricity) prices at or near historic lows across the country, online energy auctions are proving time after time to be the right tool at the right time to drive extra savings.
And they don’t cost a thing.
This combination of delivering businesses significant cost savings with zero CAPEX investment has driven record online energy procurement activity in 2020, right through the teeth of the pandemic. My friend, business partner, and co-founder, Dustin Scarpa and I have seen and learned a lot over the last 10 years together in energy procurement, but even we’ve been surprised by the success of our auctions these first few months. Yet as we’ve reflected on it, and continue to see the value our process and technology has delivered business buyers of energy, we’ve realized what has always been true: online energy auctions work because they bring the energy market directly to the customer in a transparent and efficient way, advantaging them in the process. This just doesn’t happen anywhere else.
Here’s why and how:
1. Largest supplier pool = fiercest competition for the customer’s contract
Online auctions have rewritten the rules of how many suppliers can compete to become an energy buyer’s power or natural-gas provider. The more suppliers bidding on a customer’s business – in a real-time, transparent, and logical way – means more and more savings for the customer. All suppliers invited to participate in an online auction are licensed and thoroughly vetted by both the relevant utility commissions and Transparent Energy’s market team.
To this day, many in our line of work use paper processes to “broker” energy deals. Let’s just say that, at best, this outdated method is inefficient and limits the number of suppliers participating in an RFP (because every additional supplier added to the bidding means more work for the broker and a more cumbersome process to manage). Even big-name energy management services firms have shied away from auctions, content to give their big-name customers the “choice” of just a few supplier partners, and with it a less-than-optimal result.
Simply put, limiting participation limits savings.
With online auctions, it’s just as easy to include 14 suppliers in the bidding – with standardized contract terms – as it is 4, and when the competitive juices get flowing, and each bid is reducing supplier margins as quickly as it is increasing customer savings, you’ll never go back to paper or e-mail sourcing. At Transparent Energy, we have relationships with every relevant supplier in the U.S., and we make it easy for them to participate in every pricing event for every client we serve.
Why do they do it? Why do suppliers bid in an online event that advantages the customer and reduces their margin? Because we act as a free sales channel, bringing them a clean, fair, and easy-to-use process along with customers who are ready to transact – something worth its weight in gold.
So far in 2020, we’ve been procuring on average over $10,000,000 per week in annual energy spend for our customers over the Transparent Energy auction platform. And the bidding has been fierce! With so much demand destruction related to the pandemic – some estimates put the number at a 25% reduction in power use because of the virus – suppliers are more motivated than ever to compete for new business and win it!
Retail energy markets are opaque by nature. As an Economics major at Rutgers, I developed a taste for efficient, transparent systems that yielded price discovery, a predisposition of mine that only intensified after early stints working with energy suppliers and on a pricing desk. I learned quickly that inefficiencies in the system added cost, cost which ultimately is borne by the consumer.
Online auctions are different. There are no smoke and mirrors. No back-room deal-making. No contracts awarded because of the promise of event tickets. The auctions are the market. We thoroughly inform and vet the field beforehand. Suppliers who come to bid know what they are bidding on, and the customer comes ready to award. What happens next is brilliant and beautiful to behold.
For the uninitiated, an online auction conjures the notion of an auction, but really what we do at Transparent is run a series of auctions in succession. Different contract terms (12-month, 24- month, 36-month) and products (electricity, natural gas, renewables, fixed price, variable, etc.) are put up for bid – one at a time – which, over the course of an hour or less, delivers a full picture of how the market is pricing. For example, a customer might find through the competitive dynamics of the auction that a 24-month, fixed-price contract with 20% green energy costs no more than a 24-month contract for all “brown” energy (i.e. no green component), or that a contract for power from 100% renewable sources can be obtained for just a few extra thousand dollars.
The variations are endless, but the result is the same. Suppliers bid the price down. Suppliers in the auction see the leading bid and can become the leading bidder themselves as they choose. More importantly, the customer sees the whole process play out in real time and is left with a bullet-proof audit trail comprised of every bid on every product and term, a real boon for CFOs and other time-pressed executives who value the auction’s transparency and time-stamped record keeping.
One last point here. Finding true price discovery like this happens nowhere else in retail energy. We recently had a client who was worried about expenses it might incur because of add/drops (something that resonates for so many business owners in today’s uncertain business environment). In response, we added a “product” to the auction that tested the premium a “no add-drop penalty” clause would add to the contract. The auction process uncovered suppliers who would waive off that premium, a great bit of intel the client used in its final award decision-making.
As I’ve mentioned, I’m a big fan of efficiency. So are our clients. They often have very little time to dedicate to making energy decisions, and the online auctions help them tremendously. The whole auction process is driven by efficiency, beginning with the planning our team does with the client months, even a year (ideally) in advance. That planning ensures we bring the client to market at the right time with the right expectations.
The auction platform also enables the digital development and sharing of the RFP with the supplier community and all of the legal documents that need to be executed to streamline the final transaction. And transacting is key. At Transparent Energy, we pride ourselves on a 99%+ award rate – meaning when we hold an online energy procurement event, it results in an awarded deal with the supplier. No one else in the industry comes close to our success rate.
This creates confidence in our process and drives additional savings for the customer. How so? Our real-time process, backed by high confidence that a deal will be consummated, enables suppliers to eliminate risk premiums, driving down final prices for customers by an additional 1-2%. Risk premiums are prevalent in other procurement methods, because the price of energy is always changing – if a procurement results in a customer asking a supplier to hold its pricing for an extra day or two, that supplier takes on added risk, and thus builds that risk into its pricing. Transparent’s efficient end-to-end process and industry-leading award rate eliminate this need – another cost-saving win for auction participants.
A growing number of businesses are discovering the ease-of-use and powerful cost savings – delivered without a cent of upfront capital – of online energy auctions. I’m partial to them myself. Having conducted more than 10,000 online auctions to date, achieving some of that mastery Malcolm Gladwell explored in Outliers, I’ve seen firsthand how well they work when carefully constructed and expertly executed. More importantly, I’ve seen the joy, sometimes even the relief, of business owners who have gained this welcome operating-cost reduction.
Joy, relief, cost savings. These outcomes are more important today than ever and can easily become a part of your new normal.
About the Author
Paul Shagawat is a Founder and Managing Partner at Transparent Energy, a national leader in energy-procurement services. An unabashed online-energy-auction enthusiast and trusted expert, Paul has helped guide his company to more than a decade of growth, including record 2019 results, in service of bringing hundreds of millions of dollars in energy-cost savings to Transparent’s customers.