What Is an Energy Procurement Auction?
Energy procurement auctions are reverse auctions where energy suppliers bid in real-time on customer contracts. Typically, referred to as a reverse auction due to the nature of multiple bidders (energy suppliers) competing for the lowest price, these processes allow customers to secure the lowest energy prices offered by suppliers at any given time. Unlike traditional RFPs, where vendors might submit a bid package, a reverse auction lends itself more favorably to the energy procurement sector due to the volatile nature of energy prices. Fixed-rate energy offers change daily due to the movement in energy forward markets, so reverse auctions allow suppliers to make offers based on prices for that given day. These auctions are typically scheduled for a single day and allow suppliers to make multiple bids during a specified time window, or auction period.
How the Reverse Auction Process Works
A reverse auction in the energy procurement space, typically follows a three step process.
Step 1: Pre-Auction Preparation
During the initial phase, customers, along with their energy brokers or consultants, will develop a load profile by downloading historical energy consumption data from the local utility. Customers will also make certain determinations ahead of the auction, including auction rules, contract term, bandwidth allotment, product type, reserve price, and special contract language. At this phase, customers can also elect to have all suppliers, or a limited list of suppliers, participate in the auction through an auction invitation process.
Step 2: Live Auction Event
Next, the reverse energy auction is scheduled for a specific date and usually lasts anywhere from several minutes to a few hours. During the live auction event, energy suppliers will log in to an auction platform and place their bids. Some auctions are blind and only allow suppliers to make a single bid, while others are transparent, allowing suppliers to see competitive offers and make multiple bids. This live bidding environment typically results in lower prices for the end user.
Step 3: Award and Contracting
Depending on the auction rules, contracts can automatically be awarded to winning suppliers or at the discretion of the customer. Customers may want to reserve the right to choose the winning supplier and might award a contract based on creditworthiness and other factors, not just price alone. On the other hand, auctions that are binding (contract is automatically awarded to the lowest bidder) typically result in lower overall prices for customers. Binding auctions incentivize suppliers to put their best price forward.
The Benefits of Auction-Based Energy Procurement
There are several key benefits for consumers participating in auction-based energy procurement strategies, including:
Cost Savings Through Competition
First and foremost, live energy price auctions typically result in overall cost savings of 5-15% when compared to traditional energy procurement. Real-time competition in a live bidding environment promotes lower bids as compared to “first offer” pricing seen in traditional energy pricing.
Price Transparency
In a non-blind auction, suppliers are able to see competitor bids, which further incentivizes lower prices. Furthermore, customers have full transparency into competing bids with a clear audit trail for procurement compliance. This can remove biased decision-making from the entire process.
Efficiency
Last but not least, live auctions compress weeks of RFP management into a single event. This allows customers to have an instantaneous apples-to-apples comparison of multiple supplier bids and allows for faster decision making and contract execution.
When Reverse Auctions Work Best, And When They Don’t
While reverse auctions for energy procurement are a great tool, they are not a one-size fits all solution. Here’s when it’s best (and not) to utilize an energy procurement auction:
Ideal Candidates for Auction-Based Procurement
- Large commercial and industrial loads that are attractive to suppliers
- Multi-site portfolios seeking aggregated pricing
- Organizations prioritizing transparency in their procurement process
When Traditional RFPs May Be Better
- Smaller energy loads with limited supplier interest
- Highly customized contract requirements
- Markets with few active suppliers
- Small customers who only qualify for matrix pricing
How Businesses Prepare for a Successful Energy Auction
If you are thinking about utilizing an energy auction for your next procurement contract, there are several things to keep in mind to make it as successful as possible:
- Develop a Load Profile: Prepare an accurate historical usage summary for suppliers to view. Be sure to include hourly interval data, capacity tags, and monthly peak demand figures. The more detailed the analysis the better chances of getting accurate bid from suppliers.
- Define Procurement Parameters: Be sure to include key information, such as contract term length (in months), start date, price structure, contracted volume, renewable requirements, bandwidth allocation, and special contract terms.
- Plan Your Auction Schedule: It’s important to schedule your auction well in advance of your current contract end date. Be sure that you give yourself plenty of time to contract with the winning supplier. Furthermore, you may want to align your auction schedule with favorable market pricing, so be sure to utilize the services of an energy broker who can report on forward price trends.
- Choose The Right Auction Provider: Many energy brokerage firms now have auction technology to assist their customers in their energy procurement process. Be sure to align with a broker that has contracts with all leading suppliers in your region so that you can ensure access to all pricing.
Real-World Results: Auction Savings in Action
| Customer | Contract Term | Renewable Energy | Savings |
|---|---|---|---|
| GSA Southwest Region | 60 Months | 50% (through RECs) | $33 million in total savings |
How Diversegy Facilitates Competitive Energy Procurement
In the world of competitive energy procurement, Diversegy acts as a true energy advisor, coupled with reverse auction technology. Our team of energy market experts works with our customers to pre-define auction terms, specialized energy products based on load, specific energy contract language, and more. We can then help facilitate a reverse auction that produces results based on your budget goals and risk tolerance. If you operate a business with a significant energy load and are considering a reverse auction for your next energy procurement contract, contact our team today to learn more.
