Tuesday 28 January 2020

How Companies Get Rogered Buying Energy

A couple of weeks ago I did a couple of pieces on the shameful saga of Ofgem giving energy supply licences to scamsters and no-hopers, the baleful consequences of which we all pay for.  En passant I'd remarked that, while this is mostly a phenomenon of residential energy supply, things generally being more orderly in the industrial & commercial sector, some large firms that ought to know better still get turned over when buying their energy.  

How so?  Surely, procurement is a fairly well-developed profession - for staples, if not for exotica like enterprise software - and there's plenty of fierce competition between highly competent suppliers in a fully commoditised sector like large-scale energy.

The problem started a long time ago, when gas and electricty were monopolies and a corporate "energy buyer" mostly had to step up and take the annual humiliation of being handed a take-it-or-leave-it "offer".  The only scope for negotiation at all (usurprisingly) came if, and only if, the buyer could take the monopoly's "sales rep" to see, with their own eyes, the actual kit that enabled the buyer to switch to another energy source, generally diesel for heating / a diesel gen-set.  Most of them just accepted the humiliation.  The role of energy buyer, then, was not one for anybody with an ounce of pride, or (frankly) any brains.  So come the dawn of competition, the sharpest pencils in the box were elsewhere: but the neglected energy buyers all achieved stonking price reductions anyway! - because the incumbents had been grotesquely over-charging (monopolies, yeah?) and were sitting targets for the new entrants, who were simply selling on price.  Not much immediate incentive to upskill in the energy buying department, then.

Enter the Third Party Intermediaries (TPIs), as brokers are termed in this sector.  Spotting the stupidity of many a corporate energy buyer, and in many cases the corruptibility of the energy suppliers, they insinuated themselves between the two and proceeded to claim (unacknowledged) fees from both sides, for a "service" of very dubious value in most cases.  The honest suppliers (of which there are many) despair of being mediated thus; the unscrupulous simply enter preferential deals with the TPIs, paying outrageous commissions (which they add to the price, naturally) for business that is mercilessly steered their way by the TPI who, all the while, is assuring its supposed clients (whom they are also charging) that they are all definitely getting bottom-quartile prices, and the very best available at the time, using bent data entirely concocted by the TPI itself.  (And - would you like to jon us on our golf day next month?)

The margins made by the most rapacious of the TPIs are commensurate with the margins of the suppliers themselves (I've seen the books), for virtually no risk whatsoever - quite unlike the situation for the suppliers who for the same £££ carry all manner of commercial and operational / delivery risks.  Not even, for the TPIs, the risk of being banged up - which, behaving like that in the financial sector, would indeed be a risk they ran - because, yes, the energy TPI sector is unregulated**.  Undeclared commissions, bent procurement processes and all.  Thanks again, Ofgem.

It is possible there are some honest TPIs as well, delivering a genuine value-adding service.  I'm not sure I've ever encountered one, but the possibility remains.   (The smart corporates, in particular the companies for whom energy is a significant proportion of their variable costs, wouldn't go near a TPI of course.  And why would any of them?  If they bother to look for themselves, it's a competitive, and highly transparent market!)

In this case (unlike those of the residentials, and the category of small business buyer we'll look at next) we can say caveat emptor with a fair degree of justification.  These are big buyers we are talking about that can reasonably (if vainly) be expected to look after themselves; nobody's fools - when it comes to their core competencies.  But for many, energy buying ain't one of them; and they pay for it bigtime.  (And since they pass on their costs whenever they can, maybe indirectly we do, too.)  Why they fall for the TPI blandishments, year after year, is completely beyond me (despite my attempt above to rationalise it a bit, or at least contextualise the history).  Why Ofgem stands back ... well, it's a lot on its plate (haha!), and these big corporate eejits don't deserve molly-coddling.

Doesn't do much for one's faith in rational markets, though: because the data is out there for the suckers to identify precisely how badly the TPIs are doing them down++.   
Next time: the even-worse fate that befalls the small commercial customer.

ND
_____________
** Except of course by general commercial law
++ But wholesale market data-feeds cost money, and the TPIs assure them they'll pass on the market data as part of the service!

PS   It gets worse.  I have offered various large industrial energy users to have the energy purchasing performance of their TPIs audited.  It would be easy: all historical wholesale market price-points are archived with a date-time stamp, second by second.  The industrial would provide the exact timings and prices of the deals their TPI has done on their behalf (or advised them to do).  The add-on charges made by the grid, etc for delivery through the system, are 100% transparent.  So it would then be easy to back-calculate the difference between the "legitimate" all-up price based on the genuine best-available market price at that time, and what they were actually charged.  If that difference is a contractually agreed TPI mark-up, then fair enough.  If, however, it's higher, well then ...   And if it's systematically higher over a period of time ... or if the TPI has been advising purchases at times in the market when cheaper deals could have been done at a better time on the same day, or a better day in the same week, or a better week in same the month ...

D'you know what?  I never had anyone take me up on that TPI audit proposal.  It did put an abrupt stop to several conversations, though.  The embarrassment is just too great.  
 

29 comments:

Carl Edman said...

Fascinating. Maybe not to your run of the mill blog reader (but are there any of those on this august site?), but to this US energy lawyer/economist/market designer, most definitely.

Nick Drew said...

Most welcome, Carl !

GridBot said...

Very informative post Nick, where would you suggest the price data you mentioned be found? I'd like to stress i'm not a corporate eejit that does any buying... solely have an academic curiosity!

Nick Drew said...

Proper wholesale market (traded market) brokers' live screens (not TPIs), and the exchanges.

I'll add a PS on this later.

Carl Edman said...

I am sure things are different in the UK, but I can offer some info on the US. I suspect things are more complicated here with a bunch of different regional markets with different rules plus secondary markets trading various derivative products plus ancillary products.

But the oldest and biggest US market, larger than all of the UK, and IMHO, the relatively best-run, is PJM. And they offer some nice real-time data on their web-site https://www.pjm.com/ for the general public.

Note that these are what is called in the US LBMPs (location-based marginal prices), i.e., they can vary from location to location, sometimes dramatically. They are usually set for the hour in units of $/MWh.

I am often struck how low the prices are. Right now at about 10 AM for most of PJM at the end of January, the wholesale prices are around $20/MWh (translate that into whatever units you are used to and you may be impressed too). And this is while most people are already at work, consuming electricity!

But also note that most homes in the US are heated by natural gas (which would not be reflected in the electric prices, of course), but also require air conditioning during the summer (which would be) and prices on a 2 PM in August in PJM can easily be three times as high and often peak at over 10 times as high.

Nick Drew said...

Carl - $20? Pfft: wholesale prices go negative here (and Germany) at peak wind times!

Most UK houses are also heated by natgas. Once in a blue moon, that price goes negative, too!

Carl Edman said...

Nick: They do here too and for the same reason! ;) But that is mostly a phenomenon in the flatter and more sparsely populated parts of the country in the middle of the night when the wind is blowing and nobody is using any power. That $20/MWh is more typical for this time of year and day in the most densely populated parts of the country.

As for natgas heating in the UK, I did not know that! Here in the US it is mostly older, smaller houses which may not be occupied year round that use electric heating and somebody once told me that was more common in Europe (of which the UK was then part).

Timbo614 said...

@Carl " in Europe (of which the UK was then part)" we are still part of Europe, just not the EU in two days time!

@Carl & ND do negative prices mean that the buyer gets paid to add load/use power?

Nick Drew said...

do negative prices mean that the buyer gets paid to add load/use power?

Some lucky buyers, yes. They need to be wholesale market participants, OR in a contractual relationship with a firm that is, and is willing to pass it through (usually on a shared basis)

One of the keys to improving overall system efficiency is more widespread sharing of this incentive, right down to individual households - e.g. to incentivise EV recharging at optimal times. it's coming.

Carl Edman said...

@Timbo614 "we are still part of Europe, just not the EU in two days time!"

I know, I know. I was just kidding. Over here in Yankland, what is surely is an old hat joke over there, like the apocryphal London newspaper headline "Fog in Channel; Continent Cut Off" still gets laughs.

@Timbo614 "do negative prices mean that the buyer gets paid to add load/use power"

In principle, yes. A better question is why in the world would anybody supply energy to the grid, if you have to pay it for every MWh you give it? I don't know the answer in the UK, but in the US it is a wind energy production-tax-credit (PTC) which effectively gives you $15 to $30 cash for every MWh of wind energy you feed into the grid. So if your marginal cost is close to zero, you can afford to feed the grid until the negative price becomes larger (in absolute terms) than your PTC.

I am not sure the PTC is a good idea. But as long as it is around, allowing the wholesale prices to go negative in some circumstances is actually the correct response.

Carl Edman said...

"to incentivise EV recharging at optimal times. it's coming."

While we are chatting about something I am actually somewhat informed about, I should that while I lived in Virginia, I had the local distribution utility install a separate meter on a separate rate plan to charge my Tesla Model S. That meter had higher charges during the daytime, but in the middle of the night the charges went to about $0.05/kWh when the car was programmed to charge itself every night.

That was nice. Strangely, the utility eventually eliminated that tariff provision for reasons I do not know but could probably find out if you pay my billable rate. ;)

Nick Drew said...

In the spirit of win-win and reciprocity, how about we give you a waiver on our usual blog-visitor fee then, Carl?

Carl Edman said...

Much appreciated, Nick. And if I recall correctly, you still owe me a drink the next time I'm in London for tracking down that Lord Melbourne quote you were looking for!

Timbo614 said...

"to incentivise EV recharging at optimal times. it's coming."
This is why we need truly customer friendly smart Meters! It would be programmed to communicate with don't-care-when devices to power them up/charge them when the price is advantageous. When they have that I'll have a smart meter. As we all know networking can be run (a little slowly) over mains cabling so smart devices [user sets target price] <--> properly smart meter <--> Power company [quotes a price to your device]. Bingo really saves money. For big chargeable devices (EVs or time shifting battery banks) users set device to enable or not reversing the flow at a different price :) because they risk having a useless car in the morning...

This has to come too.

Timbo614 said...

"blog-visitor fee" crikey 10+ years worth of unpaid fees :(

Nick Drew said...

Timbo gets a well-deserved waiver too - for good behaviour. And a good comment - hence my dismay at the uselessness of the SM I've just acquired

And Carl certainly gets that drink (or two)

The promised PS is now attached to the original post

Carl Edman said...

Timbo614: "This is why we need truly customer friendly smart Meters!"

Right you are. If I had my way, consumers would always be charged whatever the wholesale price at the nearest node is plus some fixed, regulated markup to compensate the local monopoly utility for its provision of distribution service.

Why don't we?

Because those opposed to it have Grandma Emmy on their side. Grandma Emmy is a lovely lady on a fixed income who always has paid the same for every kWh, regardless of time or season. Do you expect her to become some sort of market jokey constantly scanning the WSJ for today's energy prices? Or look them up on a computer? She thinks AOL is too complicated! Or pay $500/MWh peak prices? She can't afford that, you cold-hearted bastard, you!

To this one might respond that Grandma Emmy is already paying those peak prices whenever she pays her regular, cost-plus utility bill, just in a smeared out fashion. That giving her a smartmeter merely gives her the opportunity *not* to pay those peak prices if she can adjust her behavior a little. That even if she does not adjust her behavior at all, she's still going to save money because others will thereby reducing the heights of the peaks.

But that is just so much egghead economist mumbo-jumbo. In the court of public opinion, it doesn't stand a chance against sweet old Emmy.

Nick Drew said...

OK Carl, point taken: but there's a fully plausible way around this.

First up: there are industrial users that are the equivalent to Emmy, they just don't have the time in the day or the inclination to go load-shifting. For them, someone will provide a hybrid price: no peak $500s, maybe just a capped peak of $100. (or 80. Or 60) But they'll pay a smeared increment across the rest of the day (the lower the cap, the bigger the increment) to compensate the supplier for bearing the full rigour of the actual peak. Still lets them see some benefit from (e.g.) negative prices. So they, too, see a (damped) incentive to load-switch.

Emmy herself may always be a protected species, allowed to reject even the faintest of hybrid structures if she so demands. But here's the second element.

You make it clear that the fancy folks down the road are having a fine old time with their naked full-exposure price - charging the Tesla at 3 a.m. for free; using batteries at 6 p.m. and getting paid when they export to the grid etc. Pretty soon it's become FASHIONABLE - and that's when it spreads like wildfire. Yes, there'll be a few Emmy's left, but their numbers will be insignificant.

That's how Capt Cook got all his sailors to drink the initially much-scorned lime juice against scurvy. At first, he ruled that it was only for the ship's officers. Pretty soon the lower ranks were demanding to have lime juice, too.

BTW, as you know, wholesale spikes have hit the $,000s on occasions. Even the Tesla-owners may not want to go unprotected against that ...

CityUnslicker said...

This comment threat is v good and better than the next post I was going to do, which I will now do tomorrow!

GridBot said...

+1 cityunslicker. Really enjoyed reading this have learnt a lot!

DJK said...

+1, me too. Nothing substantive to add but I learned a lot and enjoyed everone's comments.

Carl: Many thanks for your contributions. I once worked with a Carl Erdman at McDonnell Douglas in St. Louis, but I'm guessing that's not you.

Carl Edman said...

Thanks for all the kind and interesting responses! I am just happy that anybody finds my ramblings worth reading at all.

As for myself, I'm pretty sure I've always gone with Carl Edman, spelled that way. But apart from that I've gotten around and show up in a bunch of places. I'm Swedish (by parentage and first language), Australian (by birth and nationality), German (by primary and secondary education), and American (by university education, residence for most of my adult life and lately even citizenship). Moreover, I was professionally trained as a theoretical physicist, practiced energy and competition law for many years, and am currently--for reason I know not--a senior software engineer at a well-known company headquartered in Mountain View, California (which would not let me speak for them in a million years). If you see a Carl Edman in any of those contexts, it's probably me.

Timbo614 said...

@Carl 2:32
So my comment at 8:02 yesterday was "teaching grandma Emmy to suck eggs" LOL

I'm still in software but not system-software, In my early years I wrote device drivers in assembler for CP/M-86 & MS-DOS. Done many things in between but in my retirement now only support a database application that I originally wrote back in 2003.

I'll add my thanks for your interesting input.

Talking of grandma Emmy she would get devices programmed with sensible defaults and would only need to press the "cheap mode" button on her appliances when setting them. No price decisions for her :)

The capabilities of extremely cheap embedded computing power like network connected Arduinos is changing things rapidly. The "internet of things" is here and expanding.

estwdjhn said...

I've been unpicking the mess that is my domestic utilities supplier (long saga which revolves around a supplier going bust, no readings taken for several years etc).

Whilst doing this, I've made an interesting discovery. Domestic gas can currently be bought at such agood rate (about 2.8p/kwh) compared to electricity (about 13.5p/kwh) that it's probably financially viable to generate my own electricity from domestic gas.

An old (1930-50s) gas engine running a generator should hit 25% efficiency (I.e 11.2p/kwh). Couple that with waste heat recovery for domestic heating / hot water, and one will be well ahead.

How on earth has our domestic electricity supply got in such a mess that this is remotely viable (I've no actual intention to do this, but might well seriously consider it if I had large business premises to light and heat).

GridBot said...

I picked up on the same - uhm arbitrage opportunity? a few months ago and did some research - turns out other folks have figured this out too and you can now get a CHP boiler for your home! Although I believe the MO is to harness electricity from waste exhaust heat using a Stirling engine. rather than burning the gas in an IC engine for electricty and harnessing the waste heat...

https://www.thegreenage.co.uk/tech/chp-boilers/

or using a Flow and scroll:
https://www.renewableenergyhub.co.uk/main/micro-combined-heat-and-power-micro-chp-information/the-flow-micro-chp-boiler/

And then their are these his clever folks: https://www.youtube.com/watch?v=e1drcs4F7fM

The future is now!

estwdjhn said...

@Gridbot

Interesting, but winning free electricity when the central heating is running feels the wrong way round. I'd rather generate all my expensive electricity from gas, then run the central heating if required (or divert the cooling outside if not).

A CHP system on the central heating will respond to temperature, and win you some cheap electricity, not necessarily when you want it. The sort of system I'm envisaging would provide 100% of my electricity (small inverter/battery system for peak lopping) for a bit less than it costs now, then give me some free heating as a bonus.

estwdjhn said...

Also - why is Vat on fuel a percentage of the purchase price?

A flat rate per kwh would make much more sense, rather like fuel duty, and would also make electricity cheaper compared to gas (which seems the intended policy direction).

Timbo614 said...

@estwdjhn
At night tho' you would be paying over the odds at 11p my night rate "economy 7" is 8p/kwh

Carl Edman said...

@estwdjhn

That is a ludicrously high price for power and a pretty good price for natural gas. In particular, with modern combined-cycle gas turbines (CCs) achieving efficiency of over 60%. A home generator is probably not going to get close to that, but might still be able to create an arbitrage opportunity.

We have a 20kW whole-house natural-gas generator in Virginia, even though the regular power is only about $0.08/kWh, because even a few miles from DC in allegedly the richest county in the US, all the power-lines are above ground and power goes out every time there is more than a slight breeze. I figured that when used it did not do *much* worse than grid power.

So why is your power so expensive? I don't know about the UK, but here in California our power is even dearer and the reason is that the state has saddled retail power with so many renewable mandates and ancillary requirements unrelated to actual power that most of the price of power is effectively a tax.

However, politicians find it ever so much more palatable to impose such taxes and spending through utility regulation rather than directly because it gives them a chance to blame greedy utility companies, rather than taking responsibility themselves. That distribution utilities charge cost-plus rates regulated by the same politicians does not much impede the effectiveness of this stratagem.