Winning the Energy Game with Online AuctionsApril 28, 2021
By Paul Shagawat, Co-Founder and Managing Partner, Transparent Energy
With the economic climate improving – COVID vaccination rates are up and accelerating, orders for goods and services across sectors are rising, and Fed Chairman Powell is speaking openly of the U.S. economy at an ‘inflection point” – business leaders are looking for fast, efficient ways to ramp up output, grow, and do so while controlling costs.
Energy touches on all three: electricity to power buildings, production, and fleets; and renewable energy to meet ESG reporting goals within the four-walls of the business and across the supply chain.
But there’s a problem. Most commercial, industrial, and institutional energy buyers – even those with highly skilled energy managers – don’t use technology to their advantage, collectively overpaying on energy by billions of dollars annually while also unnecessarily slowing their adoption of renewables.
This is odd, considering technology is used in just about every other facet of business operations, from manufacturing and shipping to general procurement and payment to hiring and benefits. Today, even meetings are conducted over technology platforms.
Making matters worse, energy is also a top-5 operational expense for most businesses, if not top 3. Do you really want to make a strategic, multi-million dollar purchase by jockeying offers over the phone or email with tools closer in sophistication to Pong circa 1972 than the hybrid cloud of 2021?
One salve for the wound of the pandemic had been falling energy prices, in some cases to record lows. But those days are over. In the parlance of energy geeks, of which I am admittedly one: rig counts are down, LNG exports are up, and so is U.S. business demand for power. Translation: The electricity, natural gas and renewables needed to power business operations cost more than they did last year and are on the rise. You still have time to act, but there is no margin for error.
This shift puts a premium on using technology to get the best possible price for energy in a way that is easy to use and fully transparent. Online auctions for energy procurement are the right tool at the right time to help your business save money, buy smarter, and get greener faster.
And they don’t cost a thing. They are a Zero CAPEX solution. Here’s the secret to their success – and to yours when you use them:
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 (mainly because auctions are capital and labor intensive – an investment they choose not to make), content to give their biggest brand-name customers the “choice” of just a few supply partners, and with it a less-than-optimal result.
Simply put, limiting supplier 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 that goes for renewable energy providers as well – 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 margins? Because auctions lower their customer-acquisition costs (savings that gets passed along to the customer) and create opportunities to bid on large energy loads. Along with these large loads, auctions bring suppliers a clean, fair, and easy-to-use process along with customers who are ready to transact – something worth its weight in gold. In an online auction for energy procurement, the customer is king!
And it’s good to be king, especially when the pressure is on to be green – and prove it. Online auctions will break you free from the expense of sole-sourcing renewables and accelerate your ability to green parts or all of your portfolio, whether you are a REIT with hundreds of buildings, a hospital or university with a growing campus, or a manufacturer with a single plant.
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 buyer – i.e., you.
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 or expensive dinners. 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 is really a series of auctions run 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 at a very low premium, or in some cases for none at all.
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, including sustainability teams, 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 found through the auction process that they could procure eight years of 100% renewable energy for less money than they could if they entered into a two-year traditional energy contract!!! Again, price discovery like this is a product of the online auction. Without it, buyers are left in the dark.
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 this success rate.
Awarding contracts nearly 100% of the time 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 Energy’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 of online energy auctions. In fact, customers using Transparent Energy’s online auctions save 7-8% on energy compared to paper-based procurement processes. As an added benefit, this sizeable savings is delivered without a cent of upfront capital.
I’m partial to online auctions. Having conducted more than 10,000 of them 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 and proven path to purchasing renewables.
Joy, relief, cost savings, green. These outcomes are more important today than ever and can easily become a part of your post-pandemic business success story.
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 2020 results in service of bringing hundreds of millions of dollars in energy-cost savings to Transparent’s customers.