All electricity supply prices are the same, right? All suppliers serving a given region should price the same way, get their wholesale power the same way and will give me basically the same price, correct? The only difference I should see, as a buyer, is the difference in the supplier’s margin, or fee, right? And maybe the consultant or adviser fee that I pay, right?
Well . . . the answer is: yes and no.
What is the same between electricity suppliers?
Most suppliers use basically the same price forecast (or forward curve) for valuing the cost of power when they build up your electricity price.
Most suppliers use essentially the same pricing model, to transform your usage and supply forecast into a retail price. They all typically evaluate risk in the same way and view the important risk premiums more or less the same way.
These two commonly shared approaches are important. It means that there aren’t typically drastic differences between suppliers in the mechanics and algorithms of pricing power.
If you are interested in learning more about how suppliers price electricity and if you want to understand the mechanics and algorithms, sign up for The Megawatt Hour University’s course on Electricity Pricing and Contracting: Basics.
So what might make prices look different then?
There are a number of reasons why one supplier price would differ from another supplier price. They are:
- Supplier risk appetite
- Supplier creditworthiness
- Your creditworthiness
- Supplier analysis of your usage or cost
- Supplier’s view of how competitive your process will be
- Contract terms and language
We will get in to the details of each of these cost drivers in the next few articles, so come back next week.
We also cover these issues in our course on pricing and contracts. Let us know if you’d like to be included in the next session that we’re running on this topic.
Bottom line for buyers and finance decision makers: Make sure you understand the limitations of the suppliers you are dealing with on a pricing request. Make sure you have a good variety of suppliers (small, large, seasoned and new to the game) so that you can make an informed decision about what you care about most.