It’s Time to Turn the Page on Sole Sourcing Energy

When Large Energy Buyers Get ‘Joined at the Hip’ with a Single Energy Supplier, Savings Opportunities Tend to Dissipate

Friends Don’t Let Friends Sole Source Energy

Over our 15 years in business, i.e., the business of helping large energy buyers leverage process and technology to optimize energy procurement, we’ve repeated one admonition: Don’t sole source.

Sole sourcing, or the decision to entrust a single supplier to provide your energy load without taking your load out to bid, is very understandable. It’s most often a matter of expediency: either the internal procurement manager or external broker/advisor doesn’t have the time, energy, or capability to “shop” the load easily among multiple suppliers, or, as is often the case, legal or other organizational complexities make it seem like picking one good provider and keeping it that way is the best option.

Whatever the reason, we can tell you from experience that sole sourcing is never the best option. Energy suppliers have much greater flexibility and experience dealing with a large energy buyer’s unique circumstances than you might be led to believe, and because we at Transparent Energy work with hundreds of highly qualified and vetted suppliers, we can get you out of the bind of sole sourcing.

Bind? Isn’t it easier just sticking with the same reliable provider?

It really isn’t, and it’s likely costing you six- or seven-figures a year, depending on the size of your energy load.

Breaking the Chains of Sole Sourcing: Three Examples

Large Manufacturer Benefits from Competitive Bidding for Energy Load

A large manufacturing plant – 187 million kWh on a single meter – had stayed with its incumbent supplier for a decade, never bringing the energy contract out to bid. This proved to be a great windfall for the supplier, but not so great for the company paying the electric bills.

Citing legal complexities, the manufacturer felt that its incumbent supplier was the only provider capable of servicing its load. Not an expert in energy supply, or energy procurement, the company dutifully supported this supplier year after year.

But when Transparent Energy delved deeper into the contract and the legal complexities surrounding how the customer’s load needed to be serviced, we found two other equally reputable and sizable energy suppliers capable of meeting its needs. Then we offered the customer something it hadn’t gotten in a long time – objective advice.

What if we brought your load out to bid in a live auction event with three suppliers? You could still select your incumbent supplier if you wanted, so there’s no risk. But let’s put the market to work for you so you can see for yourself how the market prices your load.

After some thoughtful discussions, the manufacturer agreed to auction its load.

Two things happened. First, the incumbent supplier gave its “best price” to the customer one week before the auction in an attempt to keep the contract from going out to bid. Then, in the auction, it beat that best price four times, lowering its price by more than $1.5 million per year.

Second, as in all our auctions, the suppliers competed furiously for the business. Even though the incumbent bid down its initial price by seven-figures, it still didn’t win. One of the other suppliers outbid it, saving the customer more than $1.7 million per year.

Who knows what this customer could have, and should have, been saving the prior 10 years? Sole sourcing literally cost them millions.

Overcoming Cannabis Complexity

Despite the fact that cannabis cultivation operations offer energy suppliers one of the most attractive energy load profiles in the business – think steady, predictable demand over a 24x7x365 time period – suppliers evolving intra-company legal and regulatory issues made servicing these loads problematic.

That was proving costly for a large cannabis company. Its local energy broker lacked the savvy and supplier network needed to provide energy choices to its customer, and that resulted in the cannabis firm having to settle for the one and only supplier seemingly available, and at undesirable terms.

That is, until Transparent Energy got on the case. After studying the customer’s usage patterns and supply needs, and after working closely with several suppliers to navigate their regulatory requirements, Transparent Energy identified four viable supplier to service the cannabis cultivator’s large energy load.

The resulting online auctions tested different energy products and terms, and spurred fierce competition. Over the course of hundreds of bids, the suppliers bid down their prices, saving the customer over $120,000, or 7% of its energy budget.

The firm’s CFO commented, “Transparent Energy significantly enhanced the supplier pool bidding on our business, working closely with those suppliers to iron out any regulatory hurdles in advance, while also vetting them to ensure strong financial standing. With this large and fiscally-sound competitive field secured, Transparent ran its online auction process, and we watched our saving increase as the field bid down the winning price.”

Another win for Transparent Energy’s competitive process and technology; another loss for sole sourcing.

Hedging Their Bets

Sole sourcing isn’t an “electricity only” problem. Large natural gas users, too, often find themselves sole sourcing, because they are in what they perceive to be “illiquid” markets that don’t offer obvious supply choice.

That was the case for a large steel forging operation. Having recently purchased the company, the new owner didn’t have great familiarity with the supply choices in the acquired company’s region and opted to sole source with the incumbent natural gas provider, a large multi-national.

But over time, the new owner grew dissatisfied with the incumbent’s service. Feeling “stuck,” it learned of Transparent Energy through an industry association, and the more it learned about Transparent Energy’s innovative process- and technology-driven approach to energy procurement, the more it wanted to work with them.

But was a competitive procurement even possible in a region where there seemed to be such limited choice?

With Transparent Energy, the answer proved to be “yes!”

Working with every natural gas supplier in the country, Transparent Energy scoured the customer’s market for all providers capable of serving the client’s large load (300,000 Dth annually). In this case, Transparent Energy ran a “basis” auction, pitting suppliers against each other to lock in the transportation-chargeportion of their energy needs, and drove down the winning price accordingly.

From there, Transparent Energy monitored NYMEX pricing daily, and when prices were most favorable, executed the company’s hedges, a process that required quick and seamless communication both with the client and natural gas suppliers to transact effectively.

“We are very happy with the work Transparent Energy has done for us to date,” said the company’s President. “They understand our energy needs and are extremely nimble, using process and technology to raise buying natural gas to an art form. Working with these guys is light years beyond what we were doing before with our prior provider, and the results are speaking for themselves.”

A Few Parting Thoughts on Sole Sourcing

So, sole sourcing. We understand why you are doing it, but there is a better way to procure your energy. Here are three reasons why:

1. You may have been led to believe that running a competitive procurement is too hard for your company. At Transparent Energy, we have never found that to be the case. What’s hard is realizing how much you could have been saving if you had brought your load to market and used our process to maximize competition for your business.

• You trust your incumbent supplier and don’t ever want to work with anyone else. OK, trust is great, but what has your supplier really done to earn that trust – and what are your points of comparison? Without casting any aspersions, most, if not all, energy suppliers ultimately serve their investors. When you work with an objective third party like Transparent Energy, you get an ally who is only looking out for your needs. That makes a huge difference. Just ask the company whose faithful electricity supplier of 10-years came down off their best price by $1.5 million a year when faced with real competition for the customer’s business.

• Competition for your business in a transparent and dynamic bidding environment just makes good sense. Much as Malcolm Gladwell has written of the “10,000 hours” required to achieve mastery, Transparent Energy has run over 10,000 auctions in the last 15 years on behalf of its clients, generating hundreds of millions of dollars in energy savings and invaluable risk management. Sole sourcing just doesn’t stack up.

For more information on how to break free from the pitfalls of sole sourcing, or to learn about other best practices in energy procurement, contact the experts at Transparent Energy: letstalk@transparentedge.com.