The initial transition from vertically integrated utilities to competitive wholesale and retail markets had expected challenges. When states were contemplating retail energy choice, they each took a unique path to foster competition and innovation for customers. Texas ended up with an ultimate market design that had all customers served by retailers, suppliers owning the primary customer relationship as well as the responsibility for most customer care, payment risk, and billing. Other states took the approach to have utilities provide a default price and offer purchase of receivables and consolidated utility billing to make it easier for suppliers to enter the market.
As competitive energy markets matured, retailers developed creative approaches in their quest to gain customers. Larger volume commercial and industrial customers were brought on through direct sales as well as broker channels that drove price competition. Smaller volume commercial and residential customers were acquired predominantly through mass marketing, door-to-door, and telemarketing channels. The number of retail suppliers grew with the availability of supply credit facilities, purchase-of-receivables programs, low cost EDI and billing software, and growing availability of sales channel vendors and brokers.
For large volume customers, retail competition has worked in achieving competitive pricing, price risk options, and services. This has been achieved for three primary reasons: 1) the involvement of brokers involves competition among numerous price bidders, 2) sales commissions are a low proportion of the overall cost and are most often paid as customers use energy, and 3) large customers don’t often break contract terms.
Not surprisingly, for small volume commercial and residential customers retail competition has also worked in achieving competitive pricing among retail energy providers but the comparisons are problematic in regard to utility default service. In most cases, to gain a small volume customer, a retail energy company must invest between $50-$200 to enroll the customer which is often paid upfront. The retailer also incurs costs related to billing/EDI, IT systems, customer care, regulatory compliance, etc. that it must recover as part of the mark-up it charges to its customers. Utilities’ default service pricing does not bear the burden of sales and marketing costs nor the overhead of serving these customers which is recovered in distribution rates. Although the majority of retail energy providers are pricing rationally and fairly given their cost burden, state regulatory authorities have been looking closely at retailer pricing versus the utility default service.
While many of the original challenges of the competitive energy industry have been solved, there are a new set of challenges that are impacting the way companies operate and compete. Compressing margins, high churn, and growing sales costs are making customer acquisition and retention increasingly difficult. Regulators in several states are adversarial, questioning the value of offering competitive energy to residential customers and in some cases, threatening to reregulate markets to such a degree that competitive energy as we know it may cease to exist. Customers, while increasingly savvy about energy use and purchasing, are getting mixed messages about the value of a competitive energy market and are reluctant to participate.
Recent efforts to deregulate electricity markets in Nevada were not successful, and grassroots retail energy advocates in Florida are facing opposition from incumbent utilities and others. But there are bright spots, like Arizona, where regulators are keen to reintroduce competitive market dynamics. And Community Choice Aggregators are creeping into markets and starting to compete with retail energy providers as well as utilities by offering communities and customers local control of electricity sources, including increased generation from renewable energy resources.
Even with these challenges, there are many opportunities that can be gained if a well-functioning competitive market is achieved; solutions that can only make the competitive energy industry better able to deliver value to its customers, and, in turn, make the industry overall more robust. Technology, for one, is creating new ways to find customers, interact with them, provide services, and help monitor and improve overall satisfaction. There is an opportunity for the industry and regulators to come together to create a competitive framework that both fosters competition but also drives innovation, investment, and value for end-use customers.
John Landry, DNV GL’s Vice President of Competitive Markets has been working with industry executives to design the upcoming Energy Executive Forum, May 14-16 in Scottsdale, Arizona, to dive deeply into these issues and provide a platform for competitive energy to rally. While the Forum’s theme, “The Next Big Thing (takes all of us)” recognizes the continual innovation of energy, it, more importantly, recognizes the need for all stakeholders to come together to unleash this value for customers. At this year’s forum, speakers and panel participants will include regulators and legislators that are pushing back at some aspects of retail energy as well as proponents that range from brokers to large customers.
In addition to content centered upon the most pressing variables facing competitive energy—business model innovation, digitalization, customer centricity, and regulatory advancement—this year’s Forum features two new industry discussions that are designed to spark continuity and momentum. The first, an interactive, town hall discussion where attendees will agree on the top problems facing the industry, prioritize them and form a collaborative framework to drive solutions. From this facilitated discussion a unified industry voice is explected to emerge; one that presents no doubt in the value of competitive energy markets. The second, leadership perspectives from some of the industry’s leading competitive energy executives, like Mary Anne Brelinksy of EDF, Sayun Sukduang of ENGIE, Bruce Stewart of Direct Energy, and Patrick Maloney of Inspire who will share their forward-looking perspectives on how the industry can unite in its messaging to expand and align competitive markets.
“The competitive energy industry certainly has its advocates like Constellation, EDF, Direct Energy and NRG. Who believe competitive energy is an integral piece of advancing the energy industry as a whole, and who recognize there are challenges and obstacles to overcome to truly advance innovation and unleash the true value that customers deserve.”Says John Landry
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