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 risk.  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 they?  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 customers.

ND
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** 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!