Why Bigger is Not Always Better in Energy: Understanding Aggregations

Energy procurement can be a complex and overwhelming task—from the time-consuming and costly RFP process, to navigating the energy market, to understanding government regulatory compliance. As a result, many municipalities and other governmental agencies have joined an aggregation program to help streamline their procurement process. However, this approach does not always provide the best value for your energy dollar. Here are three important points to keep in mind when weighing your options:

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  1. Bigger is not better. The concept of an aggregation, or buying in bulk, was popularized by stores like Walmart and Costco, which use their buying power to reduce prices from suppliers and pass the savings on to consumers. However, buying electricity or natural gas is not the same as buying household goods. Energy markets are complex and volatile. Informed decisions come only from vast industry expertise and a keen sense of where energy prices are headed. Buying energy in larger amounts does not guarantee a lower rate. In the energy market, timing is everything.
  2. The risk of cross-subsidies. Aggregations are better suited for smaller energy consumers who become more attractive when grouped with larger energy consumers. Unfortunately, larger energy users with multiple meters, such as municipalities and utility authorities, typically do not benefit from aggregations because they end up paying higher rates to compensate for other members who use less energy or have a low load factor.

    A similar situation occurs in the healthcare industry. In a health insurance pool, the cost of covering a healthy 25-year-old is less than the cost of covering a 55-year-old. If they both pay the same premium, then the younger member is essentially subsidizing the cost of covering the older member.

  3. Energy Firms make procurement virtually painless through technology. One of the benefits of consulting with an energy firm that provides reverse auction technology is the ability to take advantage of a more competitive bidding process. Another advantage is that most energy firms will assess the usage patterns and contractual needs of a municipality for items such as billing terms, and build those factors into the RFP. When the reverse auction is held, a municipality and its board members can watch live via an online portal as the top participating energy suppliers outbid each other during the event. Some firms will also offer legal assistance to help the municipality finalize the terms of the contract with the winning supplier.

    Aggregators and less-qualified broker firms do not provide transparent technology or risk management services when forming an aggregation.

Whichever approach you take, it’s helpful to have an experienced firm guide you through the procurement process and make sure you’re getting the best energy rate and terms possible, reputable energy firms will:

  • Be a licensed consultant 
  • Offer cutting-edge technology that provides a real-time market for current energy supplier rates
  • Have experience in negotiating contracts that comply with state law requirements
  • Provide access to legal and risk management professionals to help you make informed decisions
  • Promote a proactive approach for constantly evaluating your market position, and looks to capture savings opportunities—before and after a contract is signed