E-Commerce: Shopping for power on-line

Utilyx, the UK’s largest online energy broker, has survived the dotcom boom and bust and is now handling more business than ever. PEI finds out what has made this a technology-based success story.

Nigel Blackaby

When Chris Bowden, the normally implacable chief executive officer of on-line energy procurement company Utilyx, hears his company referred to as a dotcom, you can sense him bristle ever so slightly. Perhaps the associations are just too unwelcome these days, yet at the centre of Utilyx’s operation is a high-tech driven e-market linking buyers and sellers of energy across the worldwide web. Bowden is quick to make the distinction that from the outset; the Utilyx concept was based not just on technology but on a sound business idea. “What we set out to do was help companies buy energy cheaper and quicker. In order to do that you need technology that works.” The company now boasts the most sophisticated electronic tendering platform for half hourly, non half hourly electricity and gas in the UK. “What we are doing not only needs the powerful technology that we have, but that technology needs to be used effectively,” argues Bowden.

Dotcom or not, Utilyx has firmly established itself as a leading energy consultancy, offering procurement and management solutions to commercial and industrial energy buyers and public sector organisations. The London-based business has grown its customer base substantially since its launch in February 2000. Bowden believes one of the reasons is that more and more energy buyers have recognized their own limitations in coping with increasingly volatile electricity and gas markets. His view appears to be supported by independent energy market analysts Datamonitor, which predict that, by the end of 2003, the majority of mid-sized UK firms will be using on-line brokers. Datamonitor estimates that by the end of 2004, on-line energy brokerages will generate à‚¤90m ($95m) per annum in the UK alone.

The roots of the Utilyx concept can be traced back to the privatization of the UK electricity industry in 1990. At the time, Chris Bowden was working for N.M. Rothschild & Sons ” advisors to the UK government throughout the privatization process. Bowden then joined Merrill Lynch where he advised several large utilities on risk management and went on to work for Scandic Energy where he ran their trading operations in Scandinavia. With the introduction in March 2001 of the New Electricity Trading Arrangements (Neta) in the UK, which replaced the flawed Electricity Pool, it was evident to Bowden that the new trading mechanism would introduce more volatility and risk into the market which companies would have to address.

Originally set up as a technology company offering a platform for major suppliers and buyers to transact energy, it soon became clear to the management of Utilyx that there was a requirement for expertise and not just technology. Just as many software companies have recognised that it is necessary to provide solutions and not just a package, Utilyx has developed its business model, introducing a new range of services which link together to form a complete energy services and procurement package. “At Utilyx we are risk managers for hire, that differentiates us from traditional procurement consultants,” says Bowden.

“We have deliberately targeted bigger companies who we felt would quickly grasp the benefits of our service,” says Bowden. Several of the UK’s major energy buyers including Marks and Spencer, The John Lewis Partnership, Halifax Bank of Scotland, Barclays, Whitbread and Tesco now look to Utilyx for energy procurement. “They understand the value of what we are doing. They are looking for a fully documented approach to the procurement process and as a result we spend a lot of time with them establishing what they want to achieve and developing a strategy before we actually go to market,” says Bowden.

Utilyx first of all helps its customer establish exactly what it is that it is looking to buy. This process includes establishing and maintaining a detailed database, detailing all sites, checking that they are all correctly connected to the network and properly metered with appropriate capacity. Customers are then helped to develop a view of the market in order that they can make an informed decision about the timing of a tender. Utilyx will even send out alerts to customers when, based on its research, it feels prices are very low. Bowden stresses that Utilyx cannot give direct advice, as it does not carry the appropriate registration for giving financial advice.

When a customer does decide to go out to tender the Utilyx service is able to cover all UK suppliers, although the customer can choose just those they want to deal with. Not all suppliers will choose to quote. Suppliers are typically given five working days in which to analyse the data provided but the actual terms of the tender are that it is carried out on the day.

In a fluctuating market, suppliers are much more willing to lower margins if the quote is only out for one day. Indeed, some suppliers will now only quote for one day.

Suppliers view Utilyx as an effective channel because of the speed and reliability of data. With accurate data, Utilyx can create a new Request for Proposal form in minutes and submit this to every supplier in the UK market. Buyers can then analyse in real time any pricing structure providing a “like for like” comparison of anything from an all-inclusive single rate to a complex multi-rate seasonal time of day rate at meter point.

The Utilyx system is able to calculate the “raw” negotiable element of electricity for all offers thus allowing buyers to see clearly which offer is the lowest. Buyers can even “cherry pick’ the best offers on site-per-site basis.

During the “reverse-auction” suppliers are at liberty to re-submit their tariffs in an attempt to move up the rankings. Eventually the buyer chooses their preferred supplier and can execute this action on-line. Once accepted, information and contracts are exchanged via e-mail, followed by confirmation of the transaction between the supplier and buyer.

With so much confidential information being transmitted, security of data has to be a priority. Utilyx hosts its large servers in the same building that Microsoft holds its Hot-mail servers and believes security and firewalls are as tight as they can be.

Chris Bowden believes that the two most important aspects of energy buying are timing and speed of execution. His advice to clients is to buy when prices are cheap ” not just when contracts are about to expire. The e-procurement platform allows deals to be stuck within the day or even within the hour with buyers getting much closer to the wholesale price as a result. “Some buyers claim that their supplier leaves the price open for two weeks, but they are bound to be paying a risk premium for this to allow for market volatility,” says Bowden. Utilyx claim that its customers are benefiting from a five to ten per cent saving due to the speed of service and consequent reduction in risk premium.

The Utilyx approach is initially one of educating customers about the nature of the commodity they are buying and the associated risks. Company energy managers tend to be engineers who have never needed to deal with price risk management or procurement people more familiar to dealing with contract issues.

“Many companies do not think at all about the risk element of what has become a commodity,” Bowden explains. ” A lot of companies are still learning but we are now getting a much better reception, so much so, that demand for our services is outstripping supply”. Business has grown considerably each year with 19 TWh of energy with a value of over à‚£500 million ($750 million) having been transacted in the UK.

As part of its expanded range of services, Utilyx can now arrange group buying whereby customers join together in the procurement process to offer their joint load and generate greater savings. Although complex to manage, as no two load patterns are the same, Utilyx has carried out a number of these transactions between unrelated companies.

“Joint auctions are snowballing and they have led to customers making significant savings. In some cases, the only common feature between the companies is a desire to save money,” claims Bowden.

Although retailers have for years worked together in other areas of procurement from paper clips to computers, they are now turning their attention to energy. For group buying to take place, Utilyx needs to ensure there is a water-tight legal agreement between the customers involved in order to convince suppliers that there is real commitment to the joint purchase.

One major plc which is sold on procurement by auction and the specialist platform offered by Utilyx is the financial institution Halifax Bank of Scotland (HBOS). Shirley Treaner of HBOS’s procurement department agrees that the two main benefits of using the Utilyx service are price and speed. “I am a believer in procurement by auction,” says Treaner. “It is a very fair system and offers a level playing field, especially for non-incumbent suppliers.

Prior to appointing Utilyx, HBOS employed a bureaux service using a manual tender process. I would never want to go back to the three week paper chase game of bluff and double bluff,” she said. “All the necessary data is prepared and available on-line so that when the decision is made to go to market, we can do it very quickly.”

Treaner says, “HBOS does have its own platform which we have used for direct mail and paper procurement. We could have used it for energy but we would not have achieved such a good result plus Utilyx offers the benefit to be able to aggregate demand which we could not do on our own platform.”

HBOS made the decision to partner with fellow high street operators Marks and Spencer and Littlewoods in a joint gas procurement process. As a result, Treaner believes that HBOS got a better price still. Buying gas as part of a larger group has saved HBOS over three per cent.

Because of the speed and cost savings offered by Utilyx, HBOS has even considered going out to tender more frequently or buying forward. “There is the issue of our existing supplier relationship if we buy forward and they know they are not getting the contract,” says Treaner. “One criticism of the auction system is that it impinges on relationships, but we still have relationships with our commodity suppliers, built up after the contract is awarded.”

Alongside Utilyx, HBOS still retains an energy management consultancy company which handles the administration and billing side which, to date, Utilyx has not offered. But Utilyx is well aware of the value of adding this to its range of services. Chris Bowden says, “Companies are now looking to us to collect bills electronically, check them against expectations and against budgets. This will enable customers to get into the area of energy monitoring, targeting and management.” Utilyx plans to roll out this service to its first customer within the next few months. “We are now into the second phase; the service phase of the business.”

As part of the Utilyx service, the company looks to ensure that each tender accurately reflects the likely energy demand for the period out for tender. Bowden explains why this is necessary. “It is common for companies to use previous year’s consumption figures as a basis for assessing demand despite the fact that in many cases there is a lot of change in terms of new outlets, closed units, machinery maintenance etc.

This information is not being relayed from engineering people to the procurement department. We are ensuring that if a load shape is to change, it is the new level that suppliers quote on. This avoids penalties for changes in demand and creates an accurate budget against which to apply the tariff.”

Bowden: Companies do not think about the risk element
Click here to enlarge image

Utilyx has hired a research team, which as well as publishing a weekly market briefing, is able to carry out specific research projects for customers. Considerable expertise has been brought in including former Enron and British Gas Trading employees. Utilyx believes customers are looking to it for intellectual expertise even more than its technology. “We have been successful because we have appealed to big companies and been more than a dot com company,” says Bowden. “We offer a premium product which although not the cheapest, offers the best value.”

Up until now, Utilyx has collected its fee from the supplier at the point of execution. However, Utilyx is confident enough to accept performance related remuneration if customers prefer and is about to sign its first contract on this basis.

One other large Utilyx customer has moved onto a retainer basis for handling procurement within pre-defined parameters, in effect out-sourcing their energy risk management and contracts as well as gaining access to Utilyx’s systems whenever they need to use them. Bowden sees this approach as becoming more prevalent as companies seek to concentrate on their core competencies.

Bowden summarises the Utilyx offer, “We feel that we are now almost completing the circle. We prepare customers to buy, figure out the right time to go to market and buy quickly. Customers then consume, get the bills and we check them for accuracy and against expectations after which we are back to the preparation for buying again.”

No posts to display