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July 1, 2013

Debunking the Top 4 Myths of Electric Wholesale Procurement

by Eugene Garcia

When I talk to prospective clients about the benefits of transitioning to electric wholesale procurement, much of my time is spent correcting inaccuracies they’ve learned elsewhere. So I’m devoting this blog entry to the top myths I regularly encounter—and how learning the truth about them can benefit your organization.

Myth #1: Retail and wholesale procurement are essentially the same.

As it is with other purchase environments, retail and wholesale electric procurement differ significantly. In retail electric procurement, you purchase a bundled or semi-bundled product from a middleman (e.g. Constellation, ConEd Solutions, Noble) who marks up the price in order to capture a margin—even in aggregate procurement for multiple sites. In wholesale procurement, you buy directly from an Independent System Operator (ISO) who serves as the market clearinghouse for all wholesale electric transactions in a state or region, so you’re able to make purchases at prevailing market rates.

Myth #2: There are minimal incremental benefits of going from retail to wholesale.

In reality, there can be substantial incremental benefits by shifting to wholesale procurement:

1) Lower cost – the spread between retail and wholesale electric pricing typically ranges from 5% to 15%.
2) Full Price Transparency – there are no hidden fees since purchases are conducted in open book fashion.
3) Flexibility and savings opportunities — as a wholesale market participant, you can take advantage of demand response programs to realize more savings and collect those savings faster. You’ll see a lower electricity bill every month without waiting for a demand response vendor to send a quarterly or semi-annual check.

Myth #3: The risks are greater when participating in the wholesale market compared to the retail market.

Market ups and downs impact all participants in roughly the same way—for the same purchasing strategy, you face the same risks in the retail market as you would in the wholesale market. The difference, however, is that the retail supplier may attempt to hide some of the risk you assume in the details of your contract.

Myth #4: Wholesale market participation is more time consuming than retail market participation.

Once you’ve completed the initial set up in transitioning to wholesale procurement, there is no incremental time investment. Additionally, there are only four critical items required for wholesale set up:

  1. Selecting the appropriate entity to be the wholesale market participant
  2. Completing the application process
  3. Securing dedicated back room operations
  4. Developing an appropriate payment process with your finance team

Working with a procurement partner like ECM makes this transition seamless. We help you navigate the application process, handle all back room operations and work with your finance team to coordinate payments.

Does the transition to wholesale participation make sense for you?

If you’re considering the switch to the wholesale electric market, I recommend some quick math by assuming a 10% annual savings over retail rates. If those savings are attractive to you, the next step would be to contact an experienced wholesale procurement firm to request a free analysis of the current wholesale vs. retail market spread.

Keep in mind that sophisticated electricity retail providers often have pass-through products that appear to offer wholesale savings. But those savings may be compromised by pass-through charges, losing out on regional tax advantages, and difficulty in calculating the social costs of such purchases.

So do the math—and don’t leave money on the table.

Each ECM client that’s made the move to wholesale procurement continues to be extremely satisfied with the decision. They’re benefiting from substantial incremental savings and enjoying full transparency in their procurement decisions. They’re smarter about the market, better able to communicate results to senior leadership team, and routinely make more informed risk management decisions. And that’s no myth.

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