Large Market Electricity Tendering
August 7, 2020
Unlike Small Market energy pricing, where tariffs are controlled by industry regulators and consumer pricing is capped, Large Market energy pricing is only partially regulated, and buyers need to be aware of what they are buying. What does that mean to me? Is my energy account Large or Small? What can I negotiate? What costs are fixed?
Small or Large Market
Large Market customers are also known as Commercial & Industrial or commonly abbreviated as C&I customers in the energy industry. C&I contracts are best negotiated through a tendering process. The definition of Small or Large energy customers is based on how much energy is consumed per annum (pa). For example, customers who use more than 100-Megawatt hours (MWh) pa are classified as Large Market, in layman’s terms, this often equates to monthly bills of around $2,000, while customers that use less than 100 MWh pa are Small Market or SME’s (Small to medium enterprises). The following provides advice on C&I tenders.
Benefits of Contracting
C&I customers’ pricing is only partially regulated. Your Retail Energy charges shadow an agreed wholesale market price. If you are non-contracted, the retailers generally buy energy from a Market driven by supply and demand dynamics, which can be significantly higher than a pre-agreed wholesale price. This is often referred to as the ‘spot market’ much like in a stock exchange where the ‘spot’ price is the current price based on where the market is at any given point, or ‘spot’ in time. In these circumstances, you may be exposed to these Spot Price forces or a much higher ‘non-contracted’ price.
What are we Tendering for?
Now the decision to tender is in place – what are we tendering for? C&I energy bills are presented to customers as ‘unbundled bills. This means the various cost components of delivering energy to your premises is broken down and transparent. In the Large Market only some energy pricing is regulated. Let’s explore that further.
The following components are not negotiable:
- Network Costs: These costs are for the electricity distributors to build, maintain and operate electricity poles and wires, and distribute electricity to your premises. In Queensland the two main network distributors are Ergon and Energex. Each of these distributors are responsible for a set geographical area, and retailers work with them in regard to network charges. The distributors are regulated by the Australian Energy Regulator (AER). Costs are generally, made up of a combination of Consumption (i.e. Kilowatt hours), Demand/Capacity Charges and a Daily Fee.
- Loss Factors Percentages: As electricity flows through the distribution networks, energy is lost due to electrical resistance and heating. These loss factors are regulated by the AER. In practical terms, this means more electricity must be generated than used, and loss factors are applied to energy rates or consumption.
- Market Charges: The Market Participant & Ancillary Services charges are passed through by the energy retailer and are effectively the market operator’s management fees. Once again, these charges are regulated by the AER.
The following components are negotiable & tendered for:
- Retail Energy: This cost component is for the actual energy you use. The energy is measured through meters on each site, and in cases of community energy, it is measured via a “gate’ meter or head meter and flows through to sub meters that measure individual lots usage. There will be separate measurements related to the time the energy is used. These are called ‘time of use’ charges, and are usually listed as Peak, Shoulder and Off Peak. In the large market tendering process, these are the rates that are negotiated.
- Environmental Charges: These green costs are for government programmes to support the development of renewable energy. While the retailers must buy the renewable energy certificate from a contestable wholesale marketplace, the percentage of renewable energy to provide to customer is set by the regulator each year.
- Retail Supply Charge: Energy retailer fees associated with managing your account. These charges are at the retailer’s discretion.
- Metering: While this is a small component of the bill, these fees can often be negotiated. These charges are set by the metering provider. Retailers tend to have preferred metering partners; however large market customers are always free to choose their own provider. There are savings to be made by negotiating a Direct Metering Agreement (DMA) at the time of contracting.
Understanding the C&I Tendering Process
Energy procurement is generally best managed through a tendering process. While the incumbent may be currently offering good rates and service, it is important to test the market as contracts come up for renewal. A good procurement process to achieve competitively priced agreements includes the following:
- Use a specialist service provider who knows the market with solid energy knowledge.
- Once the tender responses are received, then a comprehensive analysis process is important to ensure ‘apple-for-apples’ comparisons. Factors taken into consideration included Pricing, Retailer Flexibility, Contract Period Offered and Minimising Disruption to customers.
- Benchmarking forward costs against current rates will support good budgeting.
- Ongoing monitoring of your contract will enable you to take advantage of any wholesale market movement, (see Forward Contracting below).
- Receiving evaluations of the ‘best value’ offer at the time of tendering, including recommendations for the contract period and supplier.
Retail Energy costs for C&I customers are not fixed nor do they follow CPI trends. The wholesale energy market is a dynamic commodity market. As with any commodity market, there may be opportunities to take advantage of any market dips. Forward Contracting means re-contracting for your energy needs – potentially 6 – 12 months before your contract end date – to lock in some future savings. Some retailers may even blend savings into your current prices if you extend your relationship with them. As such, you do not have to wait until 1 – 2 months before your natural contract end date. An energy procurement specialist can also monitor your contract throughout the term to ensure that the rates promised in the contract are in fact provided. This service is known as bill validation.
Where to From Here?
The best results when contracting your large market buildings can be achieved by contacting an energy procurement specialist to assess the options available for your specific circumstances.
If you would like to know more, please get in touch with us for an obligation free chat or leave a comment below.
This article was contributed by Solomon Freer, Senior Energy Analyst – Strata Energy Services