End users have a number of options for dealing with retailers each of which has advantages and disadvantages.
Going to tender requires a clear specification of requirements and a rigorous process for assessing proposals.
This requires a detailed understanding of existing and potential energy requirements. A bottom-up process works best, involving key decision makers at each site, taking account of expected future requirements, and considering the importance of flexibility of supply. For example, if the possibility of winning a significant future contract is uncertain, or the impact of energy efficiency measures is unclear, it may be appropriate to enter into shorter-term contracts if sufficient flexibility cannot be included in a longer-term contract.
Assessing proposals can be challenging. Retailers may provide information in a format which is not easily comparable. When preparing Requests for Quotations, clearly specify how you want the information provided and the level of disaggregation you need. Disaggregation should at least be discrete enough to separate out network charges, metering charges and renewable energy costs, as well as the separate components of the retail energy cost including wholesale energy, ancillary service charges, network losses and retail margin. When comparing quotations it is also important to understand the different pricing elements. For example, one supplier may have quoted a low energy price, but much higher environmental charges.
To prevent preferred suppliers offering uncompetitive bids, it is important to monitor trends in the market and assess offers against the information available. This requires resources and effort to monitor trends for all charges. It also requires a willingness to go to tender if the offer from the preferred supplier is out of line with trends.
Industry Case Study —Amcor – Issues to consider when planning energy procurement
Amcor follow a Request for Proposal (RFP) process for procurement of energy. Procurement is centralised and coordinated through a relationship with a single retailer in each State. The company will adopt short term contracts when prices are higher. They contract long when they observe the market is soft.
Amcor’s monitoring of futures contract prices suggest they are achieving retail margins for electricity of approximately $3-$4/MWh, which is considered reasonable given the reduction in price volatility risk achieved through retail contracting and the predictable Load Profile at Amcor’s major sites.
The company uses standard contracts offered by its energy retailers, but attaches its own special conditions, primarily to cover certain risks.
Typically, these special conditions are an attached schedule to the retailers’ standard contracts. Occasionally Amcor also negotiates to amend the retailer’s standard terms, such as when Amcor uses its own Metering Services Provider.
Amcor has found ‘Carbon market pass-through’ clauses in contracts require particular attention because they are detailed and technical. By contrast, the company has found the standard contracts used by its demand side aggregator to be far simpler, easy to understand and suitable to Amcor’s requirements.
In Amcor’s view, the most important issues for end-users to consider when planning energy procurement are:
- Understand the underlying drivers of prices (e.g. the effect of drought, supply/demand balance, the impact of ‘renewable’ intermittency in South Australia etc.)
- Regularly monitor these issues e.g. Outlook statements from the Australian Energy Market Operator (AEMO), gas capacity constraints etc
- For new sites, look for ‘sweet spots’ in the system that could minimise network charges
- Users should never seek a single Australia-wide price for energy. That will not deliver the lowest energy.
Negotiating environmental credits
Retailers often pass though their cost of complying with various support mechanisms. Informed end users may however have scope to negotiate with their retailer on this component of their retail charges. It is important to understand how your retailer determines this cost to confirm it is reasonable and linked to the prevailing market price.
There are a number of federal and state level markets for ‘environmental credits’ that have been created by governments to implement climate change and renewable energy policy.
Retailers pass the costs of complying with these schemes onto end users, either directly as a separate component on your bill or indirectly through higher rates. It is useful to take account of these costs when comparing tenders from prospective suppliers.
Retailers often set their charges based on what they expect the costs of compliance will be and what they believe the market will bear. They may also charge a premium to the actual costs they expect to incur to compensate for price risk and scheme administration costs. Negotiation is possible around these costs.
End users may also be eligible to generate certificates under these schemes through prescribed activities. These certificates can then be sold on the market or sold to retailers in exchange for reduced energy charges.
Industry Case Study – Amcor – Negotiating environmental credits
Amcor believes that renewable energy target charges levied by retailers are not always consistent with prices of traded renewable energy certificates. Accordingly, when retailers tender for Amcor contracts they are required to quote separately for all renewable cost components, to enable cost comparisons.
Amcor’s operations also generate Partial Exemption Certificates from activities defined as Emissions Intensive Trade Exposed. Partial Exemption Certificates provide partial exemption from the Renewable Energy Target Scheme liabilities. Amcor has to negotiate with retailers to accept their Partial Exemption Certificates.
Attention is also paid to ensure that renewable energy target charges levied by retailers are consistent with prices of traded renewable energy certificates, including New South Wales Greenhouse Gas Emissions Abatement Scheme Certificates and Queensland Gas Electricity Scheme Certificates.
Using intermediaries to negotiate energy procurement
Given the challenges that procuring energy pose, significant benefits can be derived from using an intermediary. Intermediaries offer a range of services that assist end users to procure their energy and improve their overall use and management of energy.
Intermediaries’ services include:
- assistance to develop energy procurement strategies
- assessing current arrangements and advising on potential risks and opportunities
- advising on how and when to negotiate an energy contract
- providing information about trends in the market, particularly price trends
- assessing proposals from energy retailers and assisting in selection processes
- undertaking energy audits to determine expected requirements and to identify opportunities for energy efficiency, distributed generation, and demand-side response
- advising on appropriate metering infrastructure and reporting specifications
- aggregating your energy profile with others to secure more favourable terms and conditions.
Industry Case Study – Oxford Cold Storage – Using an intermediary for energy procurement
Oxford Cold Storage procures electricity through an intermediary that provides a range of services to business energy users. The intermediary:
- undertakes periodic tenders for energy supply as, and when, requested
- assesses offers from various suppliers
- checks the invoices, and if a mistake is found, the intermediary keeps 50% of any savings
The intermediary charges a fee of $6,000 to $7,000 per year. The company considers this to be a small premium that results in total lower costs than would be incurred if they analysed all of the offers and procured the energy directly.
Intermediaries can be found by looking under Energy Management Consulting in Yellow Pages listings or using terms such as ‘energy trading’, ‘energy broker’, ‘energy management’, ‘energy services’ or ‘energy response’ in an internet search engine.