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Energy Marketing: Is There Added Value in Value Added?

Fortnightly Magazine - September 15 1997

the wholesale gas marketing business in the United States of about 1 to 1.3 percent. The operating profit supplying all customers averaged 1.17 percent of sales income over the four years from 1990 to 1994, and most of that profit was made in the franchise part of the business. The margins are comparable in Norway.

• As in all commodity markets, expectations of the spot price drives the price of short-term contracts.

• A key factor for success in power retailing lies in coupling control of risk with contracts that offer pricing structures and price levels customers find attractive.

How Do Customers Buy?

We interviewed a cross-section of 10 medium-to-large industrial, commercial and other types of customers in both countries. A consistent pattern among the British and the more-aggressive Norwegian customers emerged in:

• buying electricity through some form of tender;

• choosing their power retailer(s) based on price; and

• regarding electricity as a commodity.

In both countries, most customers buy in a sophisticated manner that enables them to fine-tune their plants against the spot market. Several buyers in Norway bought for reasons other than price. A major manufacturer of power equipment, for example, bought on strategic grounds, because electric companies are its best customers. A municipality bought from its own electric undertaking; and there was pressure on a supermarket chain to buy from a local electric company.

The customers were asked whether they were interested in buying the following services from power retailers: electrical contracting; power quality advice or solutions, or both; advice on efficiency of usage; shared energy savings schemes; and other technical assistance. With one exception, the largest industrial users of electricity had little or no interest in buying these services from power retailers per se. They believed either that they possessed the necessary technical skills and financial resources or could get the services more cheaply.

Several commercial customers in England and Wales were interested in using the distributors' electrical contracting businesses. Some sought advice on power quality. Others showed interest in shared energy savings schemes. Other commercial customers said they look for nothing more than electricity supply from power retailers. Apart from expecting advice on energy efficiency, which the electric companies must provide, Norwegian customers generally expected little from the much smaller utilities in the country.

One limitation of the survey reported here is that, except for a few cases, the customers interviewed were all large and sophisticated. In England and Wales, however, a number of smaller customers buy through agents. Some of these agents purchase for several customers, and their behavior appears to be similar to that of the larger, more sophisticated customers.

Another limitation of the survey is that it did not include a sample of customers in Sweden, where the market was liberalized for large customers on Jan. 1, 1996. The Swedish electric companies have a tradition of providing services for larger customers and claim success. It is, however, too early to tell whether it will prevail over the Norwegian approach of regarding electricity as a commodity and going for lowest price.

What Do Power Retailers Think?

A consensus