Since launching in August 2016, the Energy Exchange has run reverse auctions covering a range of site types and sizes, proving its ability to deal with the wide range of needs typical of many larger electricity consumers.
By Greg Sise, 12 March 2017
Energy Exchange internet-based reverse auctions run like a TradeMe or eBay auction, but the bidders are electricity retailers and the prices goes down, not up. The item being auctioned is the right to supply a larger electricity consumer (typically spending around $75,000 or more on electricity each year) on a fixed term contract at the “winning rate”.
Reverse auctions for electricity are new to New Zealand, but they have been around overseas for a number of years. An Energy Exchange reverse auction requires retailers to bid with prices that will remain fixed for the term requested by the consumer, which can be anything from one to four years at the consumer’s discretion. However, the term must be fixed before the auction runs so that all bidders know what they are bidding for. In addition, the Energy Exchange provides bidders with detailed information about the consumer’s sites and consumption patterns, which allows bidders to price their bids accurately.
For example, the first reverse auction was for just one site (called an “ICP” – stands for Installation Control Point) which consumes just under 2 million kWh per annum. The site is also supplied on a “time-of-use” pricing plan in which energy and line changes are separated, with line charges passed through from the local lines company: in this case the bidders bid only the fixed energy rates and don’t have to include line charges.
The consumer authorises the Energy Exchange to source data for each ICP in an auction, and the data is obtained partly from the Electricity Authority’s database of ICPs, and partly from the retailer currently supplying the ICP.
When the reverse auction runs, for 30 minutes, the bidders submit detailed bids which the consumer can see (as an average electricity price) as the auction progresses. If a bid is made in the last three minutes then the auction auto-extends in the same way as TradeMe. When the auction finishes, the consumer sees the name of the winning bidder and is free to contact them to take up a supply contract at the rates offered in the auction. Watching an auction on-screen is actually quite exciting!
The most recent reverse auction was a little more interesting, and it tested the systems of some retailers. Some of the many sites included in the auction were smaller and therefore not time-of-use, which means that energy and line charges are often bundled up into a simpler price plan structure, i.e. energy and line charges may not be shown separately on monthly invoices. If line charges change each year, then the bundled energy-line charges typically also change.
In Energy Exchange auctions, however, all rates must be fixed for the indicated term. This means two things: first, each bidder must have systems in place capable of dealing with fixed term bundled energy rates on smaller ICPs, and second that bidders must estimate the amount by which line charges might change over the indicated term and factor this into their bids. This has caused some bidders to stay out of these non-time-of-use auctions, although there were enough bidders in the latest auction to ensure that very competitive rates were achieved.
Setting up a reverse auction on the Energy Exchange, or the more advanced RFP/Auction combination, is a pretty straightforward process in most cases, and ensures the best price on the day. Even for larger consumers that are experienced in the art and science of working the retail electricity market, the Energy Exchange is a big time saver, taking only hours of management time instead of days or weeks.