Navigant Research Blog

Procurement Arrives In the 21st Century

Eric Bloom — December 29, 2011

In the United States, retail electricity sales are more than $300 billion a year. Only a portion of this is in competitive states – that is, states whose historical vertically integrated utilities, which held monopolies over generation, transmission, distribution, and retail functions, have been broken up, allowing end-users to choose their supplier from a host of options. Today, 17 states as well as the District of Columbia, offer competitive retail electricity markets.

Given that, you might think that every utility customer in a competitive market is taking full advantage of the choices that have been made available to them since FERC Order 888 promoted the creation of independent system operators (ISOs) and opened the door to competitive markets. In reality, though, many commercial and industrial customers have been slow to take full advantage of competitive choice. There are a number of reasons, ranging from technical barriers to accessing a full buffet of choices to aversion to change among facility managers and energy managers.

But the number of options is only going to multiply over the next decade, as competitive electricity purchasing grows from 350,000 GWh today to over 450,000 GWh by 2020. Texas and Illinois are the two largest competitive electricity markets today and, as markets open up and more C&I customers take advantage of choice in New York, California (yes, even California, despite the state’s history of unsavory competitive market practices) and other states, the volume will continue to swell.

Still, the procurement industry as a whole is stuck in the 20th century. Less than 10% of energy procured by commercial and industrial customers today is traded online. Instead, energy procurement is most often handled on paper and by phone. To illustrate just how far procurement still has to go, think of it this way: Twenty years ago, if you wanted to book a plane ticket, you had to either call airlines yourself and compare offers or hire a travel agent. Today, you go on Orbitz or another similar service and instantly compare hundreds of offers. With business customers spending hundreds of billions of dollars on energy every year, you would think the market would have gone in a similar direction. There have been attempts at creating competitive online energy markets in the past. But the power industry lags behind in many ways.

Companies like World Energy Solutions are leading the way on bringing “auction-based price discovery” to the energy procurement world. World Energy’s play is based on compiling dozens of offers from retail suppliers and helping customers select the plan that optimizes not only on power costs but also other services like demand response, green power, and energy efficiency. World Energy recently announced the acquisition of Dallas-based energy management and procurement firm GSE Consulting for $8.6 million. This followed acquisitions of Co-eXprise, a procurement firm, and Northeast Energy Solutions, an energy efficiency firm, rounding out its services to include deeper energy efficiency expertise as well as deepening its coverage of the government sector.

These advances in procurement are paralleling the convergence of IT and building systems into energy management systems and changing the way large companies think about energy. As we detailed in Pike Research’s report, Energy Management Systems for Industrial Markets, developments in building energy management technology are putting CEOs and CFOs in the driver’s seat for business-related energy concerns, with the main goal being to reduce expense by reducing energy consumption. With advanced procurement techniques, decision makers can also reduce energy costs through wiser procurement strategies. If you can reduce energy costs by 10% either by implementing a complex retrofit or by simply switching suppliers, obviously you’ll start by switching before you start thinking about making changes to the building itself.

One Response to “Procurement Arrives In the 21st Century”

  1. dbmees says:

    Insightful and provocative piece, Eric. We’ve commented on it in our own blog on the matter:
    in case you and your readers are interested. Keep it up!

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