Retail energy aggregation is the process of grouping multiple customers together to form a larger collective that shops for energy supply as a single entity. This approach can offer several advantages, such as leveraging the increased usage and volume to negotiate price discounts from retail energy suppliers. Businesses within a purchasing group can also synchronize their contracts, simplifying the organization and management of their energy contracts and renewal periods. However, there are potential downsides to consider. Different usage patterns and load factors among group members can negatively impact some participants, as those with better load factors might subsidize others, potentially leading to higher costs than if they shopped independently. Understanding these dynamics is critical for businesses considering retail energy aggregation.
What Is An Energy Aggregation?
Energy aggregation allows electricity or natural gas customers in deregulated energy states to come together and shop as a single, large group customer. Typically, similar types of customers, such as all commercial or all residential, group together as retail energy rates can differ by customer type. Retail suppliers then offer a single price for every member of the group, leveraging the collective purchasing power.
However, the agreed-upon group rate is contingent on all members committing to the deal. If any customers back out, it can negatively impact the negotiated rate, potentially increasing costs for the remaining participants. This collaborative approach can lead to significant savings and simplified energy procurement, provided all members stay committed.
How Does Contracting Work In An Aggregation?
There are several different ways a retail energy aggregation can work from a contractual basis. Let’s explore the various scenarios in more detail below.
Municipal Aggregations
In some municipalities, there are energy aggregations that are organized by the local government. In these scenarios, there is often a notice sent to customers in the area, that allows them to opt-out of the municipal aggregation. If customers do not take action, they are automatically enrolled in the group. The municipality, in turn, shops for an energy plan through an energy brokerage firm or directly with a retail energy provider. When the winning bid is awarded, the entire group of customers is contracted under the same energy rate. Recent energy policies in some states are now obligating municipal aggregations to follow opt-in contract language, which requires customers to sign up voluntarily for the aggregation.
Independent Customer Contracts
In commercial energy aggregations, each customer typically needs to execute its own energy contract with the retail energy supplier. This can prove to be difficult as the aggregated rate is contingent upon all entities participating in the aggregation. And, since energy prices are quite volatile, most retail energy supply quotes are only valid for a single day. So, if every member of the group does not sign his corresponding contract on the same day, the aggregation can be greatly affected. Energy brokers organizing group aggregations have a big challenge on their hands, as they need to coordinate the simultaneous signing of multiple energy contracts. Many of these aggregations are made of smaller groups of customers due to this fact.
Power Of Attorney
In order to overcome the challenge of simultaneous signatures, some group aggregators assign a single member power of attorney. This allows a member of the group to execute all energy contracts on behalf of the group members to ensure that all contracts are signed on the same day. This process can also prove to be challenging as power of attorney is a delicate subject matter that requires the involvement of an attorney or law firm. This option can work great for pre-existing purchasing groups, such as restaurant associations, where there is already a board of directors, or President of the organization that can lead the aggregation effort.
Benefits Of Group Energy Purchasing
Group energy purchasing offers several notable benefits. By consolidating their buying power, members of a purchasing group can often secure lower energy rates than they could individually, leading to substantial cost savings. Here are the top benefits of energy group purchasing:
- Cost savings from lower rates for larger volumes
- Negotiating power with energy suppliers
- Better contract terms due to group leverage
- Reduced administrative costs due to single-group aggregation
- Greater predictability over energy costs
- Simplification of the energy procurement process
- Ease of organization for contract renewals
Cons Of Energy Aggregation
While energy aggregation offers several benefits, it also comes with potential drawbacks that need careful consideration.
Inequitable Pricing
Not all members of an energy aggregation group benefit equally from the negotiated rates. Members with higher load factors—meaning they use a more consistent amount of energy—may end up paying higher prices than if they had negotiated independently. Typically, those with lower load factors gain the most from aggregation, which can lead to dissatisfaction among high load factor members.
Usage Volume And Price Dynamics
Contrary to expectations, increased energy usage volume does not always translate to lower prices. Suppliers consider capacity and transmission costs when pricing retail energy rates, which are based on peak demand rather than volume. Variations in peak demand among group members can lead to higher overall costs, undermining the anticipated savings from aggregation.
Contract Coordination Challenges
Coordinating the signing of multiple contracts on the same day is challenging due to the volatile nature of energy prices. Quotes from suppliers are typically valid for only one day, and aggregation quotes depend on full group participation. If all members do not commit simultaneously, the rates can increase, potentially negating the benefits of group buying.
Power Of Attorney Risk
Granting power of attorney to an energy broker or a group member to negotiate on behalf of the group carries significant risks. This individual or entity might sign an unfavorable energy contract that binds all members, who could face early termination fees if they choose to cancel the contract. This delegation of authority requires trust and clear communication to avoid adverse outcomes.
Member Changes & Contract Implications
If some members of the aggregation group close or move their businesses, it can adversely affect the remaining members. Such changes might trigger material contract change clauses, leading to penalties or higher prices. Additionally, alterations in bandwidth usage allotments within the contract can result in increased rates for group members. In the worst case, it might trigger early termination penalties that have to be shared by the group. These potential issues require thorough negotiation with the energy supplier in advance to mitigate potential risks.
Curious To See If Energy Aggregation Will Work For Your Business?
Carefully weighing the pros and cons of group energy buying is essential for any business considering energy aggregation. Understanding the complexities and potential pitfalls can help in making informed decisions and crafting agreements that protect all members of the group. Our team of energy broker experts has decades of experience setting up commercial energy aggregations, structuring groups based on favorable load factors, and realizing savings for our customers. Contact us today to learn more about aggregation and how it can save your business from high energy costs.
