Consumers are Looking for Ways to Save Money on Their Electric Bills. They want electricity cheap, reliable and without a lot of difficulty. They are interested in energy efficiency, renewables and time-of-use rates. The bottom line, however, is affordability. Enter the power brokers.
Power brokers have been cutting deals between large industrial customers and energy providers for years. The broker gathers multiple customers with combined loads to consume the large amount of electricity needed for the discount. To make this work, the broker needs to know exactly how much power their customers will use and when.
Advanced metering infrastructure technology is giving the smaller customer just that type of information. With two-way communications, smart meters let both sides of the meter have a new functionality. Intelligent technology has made it possible for utilities to set time-of-use rates, peak pricing and real-time pricing. On the flip side, the customer can get an accurate energy profile of his or her consumption, a sensor to monitor that energy consumption and a computer to control the consumption.
In 2006, the Energy Information Administration's (EIA) Electric Power Annual reported the total retail sales of electricity in the United States were about 3670 million MWh, used by approximately 140.4 million electric customers. The 140.4 million figure breaks down as 122.5 million residential customers, 17.15 million commercial customers and 0.76 million industrial customers. EIA reports that from 2005 to 2006, the average residential rate increased by 10.1%, the average commercial rate increased by 9.1%, and the average industrial rate increased by 7.5%.
In the European Union, the story is not much different. The European Union Commission's Joint Research Center reports that electricity consumption continues to rise, even with the successful measures adopted to curb energy consumption. The commission's 2006 survey revealed for 2004 (the latest available figures) a 15.6% increase in the commercial sector, 9.5% growth in the industrial sector, and 10.8%, or about 765 TWh, in the residential sector.
These figures make it is easy to see why energy brokers are paying attention to small business customers and even residential customers are watching, too.
Power brokers have been supplying electrical power for large industrial customers for a long time. Deregulation added the ability of the brokers to combine loads into more attractive packaging for the utilities. Brokers became aggregators by merging the electricity usage of mid-sized industrial loads into a single package. The New Jersey Chemical Industry Council was one of the first associations to take this approach. In 1998, approximately 60 of their members pooled energy requirements of roughly 200 MW and saved about US$20 million in the process.
This market has continued to grow ever since. Consulting firm KEMA estimates the annual competitive energy sales total to be approximately 480 TWh. On a peak-load basis, KEMA estimates the competitive market grew from 67 GW in 2005 to roughly 91 GW in 2007. The number of competitively served customers also has increased from about 3.5 million in 2005 to something like 8.3 million by 2007.
PRICE CONTROLS ARE ENDING
When states enacted deregulation, many instituted a transition period that included price caps and price controls. The transition period is ending, and consumers are experiencing the first real-time cost of electricity production (market-based rates). As a result, interest in competitive contracting activity is increasing. By aggregating energy purchases, electricity consumers can purchase power on the wholesale market at greatly discounted rates.
The alliance is managed by an energy broker or an aggregator who is licensed to buy large blocks of electricity on the wholesale market and sell to customer consortiums. The aggregators are independent electricity providers, not to be confused with utilities. They don't own generation, transmission or distribution. Their job is to find the most competitive pricing available and buy the power for their clients.
This gives the aggregated electricity pools access to deeply discounted electricity prices previously available only to large industrial consumers of electricity. This wholesale approach to electricity procurement offers much greater flexibility in competitive pricing. Groups like the Mid-Atlantic Aggregation Group Independent Consortium represent more than 6000 commercial customers with a 200 MW peak in Maryland and the District of Columbia.
COMPETITIVE POWER SUPPLIERS GET ATTENTION
KEMA notes that many states have highly competitive energy markets for business customers, but that not much has taken place in the residential market. KEMA predicts this will be changing as electricity costs continue to rise. KEMA estimates there are roughly 55.7 million residential customers eligible to be served by competitive suppliers, but only about 12% are currently taking advantage of this service (91 TWh out of 550 TWh). At the same time, only about 20% (1.5 million) of eligible nonresidential customers are buying their electricity through competitive suppliers (388 TWh out of 1028 TWh).
Competitive suppliers are getting more attention from both commercial and residential clients where they are eligible to do business. As more states move from regulated to unregulated, the market will grow in those areas. This is truly a growth market and will be a force for utilities to deal with in the years to come.
The advanced technologies of the intelligent grid are becoming very important to the aggregators and the customers. Previously, very few residents or smaller businesses had access to an energy profile showing how and when they used electricity. They only knew how much they used each month. Adding metering and tracking software of this complexity was cost prohibitive.
James Lee, president and CEO of Cimetrics (Boston, Massachusetts, U.S.), points out that, historically, utilities had little or no interest in how the customer used electricity. Their role was to get electricity to the meter. Customers were interested only in how much they were paying. Today, Lee states that with the rising energy costs, the customer is very interested in what is consuming the power and how to control energy costs. Many businesses have seen their bottom lines impacted severely by unpredictable energy costs, which gets a lot of attention. Lee says the metering of the commercial customer has been fully instrumented for many years, but for the most part those customers have not used the data to their advantage.
Another aspect of the unregulated marketplace is the opportunity to develop nontraditional strategies. Many retail-chain stores are using consultants to review their energy requirements. As a result, brokers are making package deals with energy providers for them.
Wal-Mart has taken a stand to help in energy consumption by announcing plans to sell its customers 100 million compact florescent light bulbs and by improving store insulation, and installing solar panels and windmills on some of its stores. The company also is creating its own electricity company in Texas, calling it Texas Retail Energy. It is supplying Texas Wal-Mart stores with wholesale electric power without the middleman. Wal-Mart uses roughly 1.6 MWh in Texas each year, and its trading company saves the retail giant about $15 million annually.
What is the next step? Wal-Mart customers buy food, dry goods and gasoline now. It's not much of a stretch to visualize Wal-Mart becoming a competitive electricity supplier to its Texas retail consumers. Talk about disruptive strategies.
The stage is set for aggregators, brokers and consultants to develop many different types of aggregate pools and products based on various parameters. Some are riskier, while others offer security. It is much like the stock market and investment funds. There are cooperatives that include all sizes of electricity users. By including small, medium and large consumers in the same pool, the cooperative is diverse enough to ensure the most competitive pricing.
The cooperative allows the aggregator more flexibility in procuring power. The aggregator can offer a portfolio-style product (electricity), which is a combination of fixed-price and market-priced power. A portion of the total load is contracted for at the beginning of the contract with the energy producer. For the remainder, the aggregator watches the market for fluctuations. When the aggregator identifies a favorable price, it purchases a block. This gives the cooperative a multipriced product lower than that available to individual members under a fixed power contract.
For the more risk-tolerant, aggregators offer market- or index-based products with no portion of the power requirement secured by a fixed price. The aggregator buys blocks of the pool's power requirements based on what is occurring in the marketplace. The customer accepts more risk, but also can expect lower prices for the electricity. Ultimately, the customer makes the decision.
MAYBE IT'S NOT HARD BEING GREEN
Aggregated pools are also offering green power to their customers. One such competitive electricity supplier, SUEZ Energy Resources N.A. (Houston, Texas, U.S.) offers electricity generated from both traditional and renewable resources. Recently, SUEZ received the Center for Resource Solutions' “Green-e” certification. Michel Sirat, president and CEO of SUEZ Energy Resources, says the company is excited to participate in this important program “where we will provide our customers with certified renewable resources, ultimately better serving our environment.”
SUEZ serves commercial and industrial customers in nine states with roughly 4500 MW of contracted load. In 2007, the city of Dallas, Texas, chose SUEZ to provide 90%, nearly 150 MW, of the city's electricity needs. SUEZ will supply 40% from green energy, which was critical to the city supporting its environmental commitment.
AGGREGATION RELIEVES AGGRAVATION
Constellation NewEnergy (CNE; Baltimore, Maryland) is another competitive electricity supplier offering a wide variety of fixed- and variable-priced products. CNE is one of the largest electricity aggregators located in the United States and Canada. Bruce McLeish, CNE's senior vice president of products and pricing, says that in today's volatile and unpredictable market, energy budgeting is often a futile exercise for many businesses trying to make energy decisions on their own.
CNE has developed a program called information to implementation (i2i), which emphasizes a long-term risk-management approach to achieving budget goals. CNE uses this software and data-modeling program to assess a customer's energy needs, risk tolerance and current market conditions to develop a procurement strategy to meet its energy budget goal. In talking about the marketplace after Hurricane Katrina, McLeish says that CNE really saw the value of the i2i team's experience. Its customers were able to ride through the chaos and remain within the parameters of their established energy budgets.
Generation, transmission and distribution facilities must be added to the infrastructure to meet increased customer demands. Electric rates will increase to pay for the new infrastructure and the modernization of the old. Energy costs continue to rise and will be passed through to the end users. Yesterday's energy prices may appear to be a bargain compared to today's prices, which could look attractive when compared to future pricing estimates.
Will our customers embrace the competitive electricity providers and aggregated pools of power customers? Many are already doing so. As more regulatory bodies approve market-based rates, more end users will explore schemes to lower energy costs. A school district, a subdivision or a Wal-Mart store could kick off group buying, a logical progression in the marketplace.