If an energy broker or energy consultant creates an aggregation – perhaps for a Trade Association, Chamber of Commerce or other affinity group – the members of that group are giving up considerable flexibility in choosing the type and term of their energy contracts in exchange for the hope of higher-volume pricing.
Here’s why it doesn’t work (with one possible exception)…
- More Volume Doesn’t Necessarily Mean a Lower Price
Energy Suppliers have told us that the difference in price between 5 million kWh/year and 100 million kWh/year is much smaller than the difference due to energy use patterns. In addition to volume, suppliers also weigh load profile, load factor, and creditworthiness.
- Suppliers Unbundle the Aggregation
As soon as a group of customers is brought to them, Suppliers immediately disaggregate the group it to determine what each member’s load-profile and load-factor looks like. Then they calculate a combined rate based on each member’s load-profile (usage pattern), peak load contribution (capacity), and creditworthiness.
- The Strong Subsidize the Weak
By definition this means that members with poor load profiles, poor credit or peaky loads will be subsidized by those with more balanced loads (on-peak/off-peak) which are more attractive to Suppliers.
- Everyone Is Penalized by Additional Supplier Margin
The Suppliers have an additional problem: they don’t know if more members with good loads or poor ones will accept the final group deal. So what do they do? They increase their margins to protect themselves against the downside risk.
- The Members All Give Up Flexibility
All members must accept the same type of contract, start date and end date, as well as any other terms and conditions in the contract.
- It’s a Once-And-Done Process
If you miss the deadline for joining the group, you’ll have to wait until the contract ends before you have a chance to participate. You can’t join a group retroactively (whatever your broker tells you).
The one exception is if you have a poor load, when it could pay to join an aggregation because someone else might subsidize you. If you have a well-balanced load, however, you’re subsidizing someone else and can certainly do better on your own.
Sometimes, smaller or unattractive loads can disproportionally increase a group’s rate. We have ample evidence that it usually pays to exclude the worst loads from any combined energy purchase. (Those loads can be handled differently and will still receive reasonably good rates.)
At Applied Energy Partners, our approach is different. We have massive buying power: 1 Billion kWh/year of electricity, and 3 Million decatherms/year of natural gas. As a consequence, we matter to the Suppliers, and we get their active participations in our auctions. We hold individual auctions for every Client – no matter their size or load-profile – but all our Clients benefit from the overall volume we bring to the Suppliers every year.