Our Energy Market Wraps aim to educate and equip you with the knowledge to navigate the complex challenges of the Australian Energy Market. Our team of experts decode complex market data to deliver cutting edge insights on the commercial energy market in a short consumable video. These insights help you make informed decisions about how to buy and use energy.
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G’day, welcome to my latest market wrap and week whatever of lockdown here in NSW. I’m using this recording to escape from the kids, so bear with me while I stare blankly at the screen for 5 minutes…ok so this isn’t going to work – instead, with the new financial year now in full swing and coming up to peak expiry season in December, I thought I’d give you my perspective on the 4 most talked-about procurement methods in the energy market and their pros and cons.
Quick disclaimer, Energy Action utilises all methods described but my intent is to be unbiased and give you high-level detail so you can then start a conversation internally, with us or your consultant.
I won’t go through the green auction process here as we have a video already dedicated to this.
Starting with the most obvious:
This is the most common form of procurement and involves taking your portfolio to market via the various retailers and requesting pricing. Usually, this is run over 2 to 3 rounds to ensure competition.
Pros – you have greater control of special requests within the terms of the agreement, while also having the option to view as few or as many rounds as required.
Cons – It can sometimes be a long process due to the multiple rounds, which in a rising market could see offers go the wrong way post round 1.
Reverse auctions are usually run within a predetermined time-frame with retailers bidding against each other on the black energy, environmental charges and service fees. The auction process usually takes 10 minutes but is extended depending on the level of bids dropped.
Pros – It’s the most transparent form of procurement as the participant watches the bids drop in real-time and delivers the most competitive pricing on any given day. Also worth mentioning that sign off periods for contracts are notoriously short so this also gives a definite time and date that offers will be presented, allowing entities to line up signatories.
Cons – Timing is everything – this method relies on timing the market well as if you go at the wrong time you don’t get multiple rounds. It's also worth thinking about what T&Cs you would normally look to change in a contract as auctions work well when there are minimal amendments.
This is a non-traditional method of managing energy price risk, which, instead of contract 100% of your load for a fixed duration, you can buy a percentage of forecast load during the term of the agreement.
Pros – with the right timing you can purchase bundles during lows in the market and avoid locking in during peaks. Being able to take advantage of market-price drops is the biggest incentive for taking on this method. You also have greater control as to how much of your load you fix and at what price.
Cons – This product is only suitable for entities that are flexible enough to lock in bundles and pricing within a short period of time and don’t require definitive pricing for budgeting purposes. This method also suits larger load clients say greater than 10gWh/year due to costs of consultants, which we recommend utilizing.
There is no real standard form for these contracts as each Corporate PPA is negotiated from the ground up, however, the underlying principle is for a business to purchase electricity from a long term – 10+ year agreement directly from a generation project.
Pros – it’s seen as progressive and innovative where the customer purchases directly from a wind or solar project. This helps tackle a corporations sustainability plans, having a direct contribution to lower emissions. There is a level of price certainty with the ability to lock in firm prices for the longer term.
Cons – there are generally firming costs through the length of the contract. While price certainty is an advantage, this sometimes can be blown out by firming costs, which helps manage the mismatch between the project supply and your demand. They deviate away from your traditional retail contract and as such require lawyers at 10 paces to work through the terms. The term being 10+ years creates an issue for most “what happens when a new CFO enters in 5 years and questions the agreement signed?”
As with anything in this space, there is a whole lot more to factor in and engaging with a consultant is highly recommended. As I mentioned in my last video, make sure it’s someone you trust as you will often be working with them for years.
Please feel free to reach out to me via my LinkedIn page if you want to discuss further or have any ideas of what you would like me to cover in my next video. Otherwise, give Energy Action a call and we will be more than happy to help.