Although online energy procurement has yet to be adopted widely among end-users, the Internet is seen as the wave of the future, according to corporate energy managers interviewed by E Source, the retail and consulting arm of Financial Times Energy in Boulder, CO. E Source asked energy managers about the role of the Internet in their energy-purchasing decisions and their experiences using online hubs. For the most part, energy managers believe buying energy online offers many potential benefits in terms of time and cost savings.
The flow of energy transactions through retail e-hubs remains relatively insignificant compared to the potential for such interactions. The same is not true of online wholesale energy trading. Since its launch in November 1999, EnronOnline, the undisputed leader among wholesale trading exchanges, has hosted more than $500 billion in transactions.
By contrast, e-marketplaces in the retail energy space, such as Amdax, eChoicenet, EnergyGateway, eBidenergy, Enermetrix, UniGridenergy, and Powerspring haven't yet seen anything close to this volume of transactions. Enermetrix, one of the more active retail energy exchanges in the U.S., claims annualized trades in excess of $400 million for 2000.
All of these companies are struggling to build the critical mass of energy buyers and sellers to establish the necessary liquidity, a task that is proving to be a classic "Catch-22" assignment. Energy managers are reluctant to post their load if there aren't enough suppliers online to bid on it, and suppliers aren't convinced there's enough load out there to bid for, so they hesitate to sign on.
Joe Main, national energy manager for Tricon Global Restaurants in Louisville, Ky., said he's decided to wait to participate in an online energy buy until the situation changes. "Although the Internet is pretty good at providing price transparency, the problem is that some of the more competitive regional suppliers have not participated in the auction. Given the regional nature of the marketplace, you need everyone on the portal. If you think you're not getting the best price, you're not going to participate," he said. The result? Insufficient liquidity and few deals.
Nevertheless, E Source believes energy managers will come to see e-marketplaces as a standard channel for procuring the commodity and as a means of supporting their energy management decisions. When market conditions improve and allow for healthy competition in retail energy markets, the Internet should come into its own as the most efficient and flexible way for commercial and industrial customers to conduct commodity transactions and make energy management decisions.
Managers articulated five benefits they see arising from the use of Internet hubs: exposure to competitive, sophisticated energy pricing; lower transaction costs; shorter bid/ask cycles; wider reach to suppliers; and simplification and convenience.
Nearly all respondents believe in the potential of the Internet to lead them to the most competitive prices. That confidence is closely tied to the Internet hubs' ability to help buyers reach a wider spectrum of suppliers than ever before, which is a fundamental benefit offered by Net markets. The traditional RFP process tends to limit the number of vendors reached. Companies interact with the same, known quantities. A Net market immediately opens up a new spectrum of bidders without necessitating the kind of extra legwork buyers would have to do to identify and screen new suppliers on their own.
Online hubs reduce transaction costs by taking much of the redundancy out of the RFP process. Energy managers must still fill out forms online, but the data is housed in an easily accessible format, and because they are stored in a central location, there's no need to send the same information out to multiple suppliers.
Bid/ask cycles also are reduced online. In volatile commodity markets, buyers need to lessen the procurement cycle time and speed up communications with sellers. "Under the conditions of the current RFP process, the market can change 15 times by the time you receive responses to your RFP," said one energy manager who procures energy for a chain of supermarkets in the Northeast and Mid-Atlantic states.
One perception in the market is that pure transactive capabilities are not "sticky" enough to capture users. Analytical energy information services and other management tools are becoming as important as the transactions themselves. Net marketplaces are touting a variety of value-added services as accompaniments to the automated RFP and auction services at their sites, such as energy information services (EIS) like bill disaggregation, benchmarking, load profile analysis, and bill history; risk management and insurance services; transmission scheduling; and information on market conditions, including typical portal offerings such as weather and news. Online hubs are quickly moving to add these services to enhance their offerings and to differentiate themselves from competitors.
Most energy managers agree it would take several years before there was enough liquidity to keep these online hubs viable. As Cargill Energy's J.F. Muse pointed out, existing long-term contracts would have to expire before the total amount put out for bid online could increase. "If we plan to have all our load in the online system, it could take another two years," Muse said.
Many signs point to an inevitable future for online energy retailing. The crowded field of players will inevitably be narrowed, as various exchanges merge with one another in an effort to build liquidity. And, of course, the status of restructuring will have an enormous impact on whether enough load becomes competitively available.
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