The procurement consultancy market has gone through many changes recently and is still developing fast. Tim McManan-Smith met up with John hall, chairman of alfaenergy, to discuss the market.
alfaenergy is an independent energy consultant that procures for clients across both the I&C and SME area. John Hall, formerly of John Hall Associates until it was sold, is now chairman of Alfa. I suggest that broker is perhaps a limited term for modern procurement agents and that many prefer third party intermediary.
“I am not a third party intermediary. I am the customer. I am the client. I represent the interests of the consumer. I am talking on his behalf. I am negotiating on his behalf, and the supplier knows when they talk to me they talk to the consumer. I was a consultant representing, not a broker who has their own objectives,” says Mr Hall.
A charter for consultants?
Given that Ofgem is proposing a new code of practice requiring brokers and other TPIs to be clear with businesses about their fees, the contacts they offer and which suppliers they represent, is the long awaited charter for brokers/consultants about to happen?
Ofgem thinks that the market should be self-regulating,” says Mr Hall. “The main problem is taking payment from both suppliers and the end-users. I have always insisted that every fee is totally transparent, no question about it. The favoured way for I&C customers it to work on a fixed fee for the client, normally paid by the client. They sometimes want payment through utility bill and we will do this as long as every party is clear about the fees. The first question to Alfa when I came here was: how do we get our money?”
Many brokers will take a hidden commission and they will take money from both ends. The problem is they will not tell the consumer if and how much they are taking from the supplier and Mr Hall says the question is who is the client?
“I’ve seen a pound per MW added on, a penny per therm; an I&C buyer will scream and rant and rave about a 0.2% uplift for a supplier on a large contract yet at the same time perhaps paying a penny per therm hit through the broker.”
So will Ofgem get its way and have a charter for transparent pricing?
“Consultants have to sign up a declaration of fees for a charter to work. When I have brought the topic up at conferences, they say why should we declare our margins? Any worthwhile charter must contain costs and for that reason it won’t happen. They will never sign up for transparency of billing,” states Mr Hall.
Is pricing everything?
For certain client it is true that price is the overriding factor. “All they want to do is get a cheap price and that’s it, move on and forget it. On the SME side, cost is what matters to them and they’ll go for it. As you move up to larger users, surprisingly cost becomes less important.” says Mr Hall. “They look more at the profile of the contract they are getting. They also look at the service level they get. They want the flexibility to come in and go out of the market across various sites in their portfolio. Payment and extended credit is very important for some organisations, more so than just price. They also want some kind of assurance regarding take or pay.”
“Any worthwhile charter must contain costs and for that reason it won’t happen. They will never sign up for transparency of billing.”
Payment terms of 30 days are now going to 120 days in some cases and end users will give something on the unit price for that. They also want some cases and end users will give something on the unit price for that. They also want some kind of assurance regarding take or pay; they want to have flexibility on that. This is the situation whereby you have contracted to purchase a certain amount of energy and no longer require it through a downturn or even energy efficiency measures. My Hall observes that “for the larger buyer you will look at a whole range of different things and the last think you look at is price”.
He says: “Timing is very important as well as the terms and conditions. The fact remains that all suppliers buy from the same wholesale market and so the same sort of price. Payment terms, flexibility to take out sites and bring them in, day night rights, ease of billing. What reporting service do they give you? You get all of this right first and then go for price.”
Why use a consultant?
It is easy to question why a consultant is necessary for buying energy, why are they important? “Customers don’t look at it like that. The real difficulty as one large energy buyer said to me the other day, you don’t get any prizes as they energy buyer because this year is more expensive than last. The total cost is going to go up year on year, it’s not going to go down.
There will be the odd dip here and there. Prices are artificially high now but they won’t come down to realistic levels due to geopolitical tension.”
Surely in-house teams could procure energy effectively?
“Well then do it yourself” says Mr Hall, “but they won’t take the risk. They don’t often have the in-house expertise to know what is happening in the market. They are buying for two, three maybe four years ahead. You have got to be in that market following it day by day.”
Mr Hall contends that most organisations are looking for someone to purchase energy for them and that it is cheaper using a consultant than having this level of expertise in-house. He also stresses that energy procurement is one area that can be intensive on time.
There is also the additional security that all bases are covered. My hall says it is similar to firms having an external accountant.
AMR and bill validation
With AMR and smart metering domestically, surely bills will be accurate and therefore bull validation as a role for consultant will become a thing of the past?
However, Mr Hall says: “The bill has two components: consumption and charges. Consumption data will improve with AMR but that doesn’t mean that the bill will be correct. Suppliers can make mistakes in applying prices p/kW or in applying charges.
“Somewhere down the line there is a manual input and that is where something can go wrong. Postal code changes also cause difficulty, that postcode is linked to the premise and the customer. Transmission and distribution are all fixed and non-negotiable, you still need to get on top of it and validate bills because they can be wrong,” he says.
Mr Hall is of the opinion that suppliers are still bad at getting it right. In their defence he observes that the integration of suppliers is a mammoth task and to merge databases of customers is far from an easy task.
Mergers and acquisitions
There has been a lot of activity over the past few years with consultancies merging to become large operators and acquisition form other large corporates that see a procurement consultancy as a strategic fit.
“You have people on contract for a consultant that are now being guided towards products that are not something that they signed up for and probably don’t want or maybe even need. They are being bought as databases so that they can sell the services of their company as opposed to fulfil the contract,” says Mr Hall.
Founder and CEO Damir Ahmovic believes that growing organically is best, to learn as they go along and develop with their customers.
“Customers are not stupid they pick up on this quite quickly and realise that they are being used to sell products to and the reason they joined the consultant aren’t there anymore. You have got to be independent.”
alfaenergy now has four international offices, more than 90 employees and 4,000 clients, and is now responsible for more than £1bn of annual spend on energy. It was nominated and subsequently won Broker of the Year at the 2012 Energy Awards.