Nonprofit 411: Energy Buying 101: Securing Beneficial Electricity Supply Arrangements

By Liam Sullivan, Director of Marketing & Communications, PowerOptionsLiamSullivan

Massachusetts operates in a deregulated electricity market, giving consumers the opportunity to choose their own electricity supplier or to simply remain on utility-supplied “Basic Service.” Those looking at competitive retail supply options can negotiate for price and terms and conditions, with the opportunity for savings and other benefits. But the competitive market also brings risk. Suppliers’ proposals can be very complex and difficult to decipher, especially for people not directly working or knowledgeable in the energy industry. For companies with sophisticated energy technology and dedicated staff, it is a no-brainer—the competitive market represents opportunity. For other companies, there can be real bottom-line consequence to making an uninformed decision.

In 1998, the Massachusetts Legislature restructured the electricity market, taking power generation away from the utilities and making them into transmission companies that operate the wires that deliver the electricity. These are the same utilities you have known for decades. Power coming to you through these restructured companies would be supplied by energy marketers who would compete for your business.

In the simplest of terms, that is how the new open market was supposed to operate, and 15 years since competition began, it is working that way for many consumers. Still others are not participating in the market because they do not have the size or usage that attracts suppliers or because it is easier to maintain the status quo—the status quo being Basic Service which is electricity supplied by the utility, mandated by the legislature as a backstop to the competitive market.

Basic Service was originally designed as a temporary supply option while consumers chose a competitive supplier. The law requires that it be a short-term price, so it changes monthly. Therefore it is a highly volatile price that exposes customers to fluctuations in the market. But it is easy for customers because they do not need to do anything to be on Basic Service, it is the default price—which is what it was originally called.

The alternative to Basic Service is competitive supply. It allows customers to tailor their electricity supply to match their usage and needs. Customers can lock in a price or chose a pricing option which reflects their company’s usage and risk tolerance. Having competitive supply can offer predictability for the contract term—prices will not change monthly as with Basic Service, helping customers manage their exposure to the market – as well as lower costs.

While competitive supply has clear benefits, it can sometimes be difficult to obtain a competitive supply arrangement. It can be difficult to identify a reputable supplier. Even if you find out who the suppliers are, many do not want to serve small-to-medium size customers, who typically are not on interval, hourly usage meters. It creates an administrative burden for the supplier, and from their perspective it is hard to predict usage. It exposes the supplier to risk, and the risk is reflected in the contract price and terms.

If you are successful at getting an offer from a competitive supplier, you must now evaluate the proposal to determine if it is beneficial for your company. This can be challenging because it is not just about price. The supplier may have rights to pass through costs that may come from law changes or policy issues, and you want that limited.

Brokers and consultants can be helpful, but be sure that you are dealing with an objective and accredited advisor. In Massachusetts, brokers must be licensed to ensure that they have knowledge of the workings of the market. Even so, many suppliers have relationships, i.e. finder fee agreements, with advisors or brokers that need to be fully understood when interpreting the information presented. Many of these agreements limit your ability to shop their offer against other options, and this should be a warning sign to seek another consultant. Don’t ever sign an agreement with a broker that takes away your rights to compare offers from other suppliers.

The Consortium based model offers customers a viable and safe way to benefit from the competitive electricity market. Consortiums, or buying groups, leverage the buying power of an entire group to get supply arrangements which benefit all in the group. Because of the economy of scale, a consortium can undertake a rigorous competitive procurement, employing top experts who will look out for your—and every member of the consortium’s interests. It is a model that has proven successful for many customers, often providing these customers with further guidance and insight into the energy markets.

While there is risk in acquiring competitively supplied electricity, you can mitigate it by being informed and seeking qualified, objective guidance. The benefits of the market are open to all, even smaller companies, by connecting to a like-minded group.

About PowerOptions

PowerOptions® is the largest energy buying consortium in Massachusetts, serving more than 500 nonprofit organizations and governmental entities with combined annual energy purchases of $175 million. With supply programs for electricity, natural gas and solar power, PowerOptions provides its members budget certainty and savings, as well as best-in-industry consumer protections not available anywhere else. For more information, go to www.poweroptions.org.