Whether you are a business owner or energy broker helping your customers to develop an effective energy strategy, it’s imperative that you understand the various types of energy supply products available in the market. Although most retail energy suppliers market fixed-rate energy plans, there are different variations of electricity and natural gas plans that might better suit your needs. In this article, we will explore the importance of these supply plans and how to pick the best energy supply product based on your energy needs.
Why Energy Brokers Should Understand Energy Supply Product Options
If you are an energy broker or consultant working for an energy brokerage firm, then it is critical that you educate yourself on the wholesale energy market, retail energy market, the history of energy deregulation, and the different types of energy plans available to your customers so that you can be a valuable asset to the market.
The Role of Energy Brokers
Commercial and industrial customers consider hiring energy brokers to find lower-cost energy, become more sustainable through green energy solutions, manage energy contract renewals, and eliminate the headaches associated with managing energy costs. If a customer decides to utilize your broker services, you need to be knowledgeable enough to provide true value.
In fact, the best energy brokers in the nation not only understand the anatomy of an electricity bill, but they are also experts in evaluating business energy consumption, electrical transmission rates, energy capacity, energy efficiency, and other factors that influence energy costs.
Becoming an Expert in Energy Supply Products
If you are interested in enhancing your career, becoming a better energy broker, and earning six figures by selling energy, then you need to become an expert. Learning about the various types of retail energy supplier plans is one component to becoming a successful energy broker.
Types Of Energy Supply Product Structures
There are many standard and custom energy supply products available to commercial and industrial customers in deregulated markets. Outside of standard fixed-rate contracts, retail suppliers offer index-based products, block + index products, load-following block + index products, and other custom hybrid structures.
Fixed Energy Rates
Standard fixed-rate supply products are the most common in the retail energy sector. A fixed-rate agreement between a customer and a supplier is straightforward. In the contract, the supplier agrees to sell electricity or natural gas to the customer at a fixed price per kWh or CCF for a certain period.
- Fully-Bundled Fixed Rates: Fully-bundled fixed rates include all cost components, such as capacity, transmission, and ancillary services, within the fixed price. This option offers complete budget predictability and simplicity, making it ideal for smaller businesses or those seeking a hassle-free energy strategy.
- Fixed Rates with Pass-Throughs: In this structure, certain costs like capacity or transmission are passed through to the customer as separate line items, based on actual usage. This allows for more transparency, but to be effective, it requires customers to monitor market changes and curtail their peak energy demand using energy efficiency strategies.
Index Rates
Index energy rates, on the other hand, are the exact opposite of fixed rates. In an index-based contract, the energy supplier passes through the wholesale cost of the market each hour, day, week, or month with a slight mark-up.
Although index rates can be very low and attractive when market prices are less volatile, they also carry a great deal of risk. When certain events happen that impact the market, such as a severe winter storm, energy index prices can double and triple. Customers buying index rates assume the full risk of the market.
Index supply products are good for those customers who traditionally pass through the costs of energy into their products or services. Oil refineries, for example, typically buy electricity on the index market since they pass those costs along in the price of the refined fuel.
Hybrid Energy Rates
There are many other supply products available that offer a combination of fixed and index rates. Larger, more sophisticated energy customers typically utilize a combination of fixed and index rates to achieve the best balance between price and risk. Let’s explore some of these hybrid energy plans in more detail.
Block + Index
A traditional block + index product allows customers to lock or hedge certain quantities of energy while floating the index market for other quantities.
Load-Following Block + Index
In a load-following block + index, the fixed portion of the product follows the customer’s load shape, so customers can lock in percentages of their load and not usage quantities.
Financial Products
Some of the largest users of energy even utilize financial hedges, collars, and options to maximize their benefit and control energy price risk. These companies often utilize the services of an energy trader or trading company to help them offset the volatility of the market using financial instruments.
Choosing The Right Product For Your Customers
Energy brokers trying to help their customers navigate the energy markets must understand how to match the right type of energy product with the right customer.
Understanding Energy Risk Tolerance
First, it’s important to interview your customers and understand their risk tolerance. Customers that are interested in price certainty with no risk are much better candidates for fixed-rate plans when compared to those who are willing to “play the market” a bit more.
Examine Usage Patterns
Next, look at their energy usage patterns. Certain types of energy supply products are better for consistent energy consumption, while others are better-suited for unpredictable usage. For example, a traditional block + index product might not work for a manufacturer with inconsistent power consumption as the pre-purchased blocks could supersede their usage during downtimes. A better solution for this type of customer might be a load-following product.
Consider Cost Forecasting
Energy brokers can add significant value by helping clients forecast costs for various product options. By analyzing historical usage data and future market trends, brokers can provide actionable insights that align with a customer’s financial and operational goals.
Choose The Right Supplier
Finally, it’s important to place your customers with an energy supplier that can service the chosen energy plan. Some suppliers are not technically equipped to handle a load-following block + index or complex financial hedging strategy, while others are better suited for fixed-rate plans.
What to Avoid
Even experienced energy brokers can make mistakes. Here are common pitfalls to avoid.
Do Not Assume One-Size-Fits-All
Every customer has unique needs and energy usage patterns. Customization is key. Do not assume that all customers want fixed rates. It’s best to start with an initial consultation where you assess risk, historical energy consumption, and future budgetary goals.
Beware of Inexperienced Suppliers
Choosing a supplier with a poor reputation can lead to billing errors or unmet expectations. Some newer suppliers do not have the financial wherewithal to offer fixed rates for large loads. This requires a significant amount of capital and can leave the supplier exposed if there are volatile swings in the market. It’s always best to match your customers with trusted suppliers to protect your reputation.
Read Contract Terms Carefully
Ensure the contract terms align with the customer’s expectations. Pay attention to clauses related to auto-renewal, pass-through adjustments, material change, and termination fees. It’s important to verify that the terms of the energy contract reflect the rate offer from the supplier.
Need Help Choosing An Energy Supply Plan?
Being able to fully understand the complexities of each energy supply product and how they are beneficial to your customers will differentiate you as an energy broker. In fact, brokers who act as advisors are able to retain their customers for a longer period of time when compared to brokers who simply act as salespeople. Whether you are an energy broker shopping for your customers or a commercial/industrial operator, we can help you navigate your energy supply options. Contact our team today to explore more.
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