True e-commerce,with the buying and selling of equipment over the internet, is finally making real in-roads in the power industry. Junior Isles catches up with some of the latest developments.
The power business has in many ways lagged behind other industries in making full use of the internet.
Even with extensive electronic data interchange (EDI), the energy industry still depends heavily on paper-based processes. It is true that many utilities are now able to offer multiple services and on-line billing to reduce costs. Meanwhile, power brokers and the like have even implemented energy trading systems which use the internet to bring together buyers and sellers of electricity.
Nevertheless, it could be argued that using the internet for true business-to-business (B2B) e-commerce is yet to take place. But it looks as if things are about to change. In both Europe and the USA, developments are underway which may change the way that utilities do business with suppliers.
The US, home of the internet, is usually the first to bring internet solutions to the market. In March, Chicago-based company Energycentric announced the formation of what is being called ‘the first on-line B2B marketplace dedicated to the equipment and services side of the energy industry’.
The equipment and services side of the US energy transmission and distribution market is worth an estimated $30 billion and is comprised of about 3500 electric and natural gas utilities that are geographically fragmented. Further, only 20-25 per cent of companies dominate industry purchasing power. But despite such a huge market, there is currently nothing available for purchasing products online.
With the introduction of its website, Energycentric will bring e-commerce to utilities and their suppliers without requiring significant investments in resources and technology by using the internet as a marketplace. The Energycentric.com website is designed specifically for buying and selling products and services that go into the construction, maintenance and operation of an energy delivery infrastructure for electricity and natural gas.
Sue Craft, the founder and CEO of the company explained how the idea first came about. “About a year ago I was working on some problems that the industry was having regarding transaction formats and moving gas and electricity under deregulation. At this point the whole issue of moving supplies online and supply chain management coalesced into the idea of solving this business problem through an internet solution that would work for everyone.”A three-way partnership was soon formed and has been moving forward as a team since August. Late in the autumn of last year a fourth partner, Consolidated Commerce, was added to provide the company’s technical platform and technical leadership for the management team.
The company will initially focus its efforts on the US market, although as Craft pointed out: “as soon as we establish our business on the internet, we are in fact a global market.”
Energycentric.com is also selecting the type of equipment it will cater for. The company will initially focus on transmission and distribution equipment but expects to expand its product listing fairly rapidly.
“We will be selling transformers, wires, poles, valves – big equipment and small. Both commodity products and engineered products,” noted Craft.
Users will not need any special equipment or software to use the new service. Any internet browser could be used.
To use the system, utilities would first have to become “clients” since Energycentric.com would need to establish their company profiles and reflect their management control procedures in the site. This would enable them to maintain their existing control procedures. “We would establish profiles for all of their purchasing agents that would be working on the system. The profiles would define the type of products the person could buy, the cost levels they could go up to and the kinds of approval processes that are needed,” said Craft.
Once this is set up, the user would then go online to shop. They could pick a supplier or continue to use the the blanket purchase order or whatever existing relationship they have with their supplier. They could also view the status of the purchase order on line and could make comments on line. For example they could discuss with the supplier or purchasing agent, any necessary substitutions or delays. “Anything related to the purchase order could be reviewed and discussed online,” noted Craft.
The supplier would then send the purchase order acknowledgment and advance shipment notices – as recorded online – and then ship the product and invoice online.
From the supplier perspective, again the supplier would be set up as a client. A company profile would be established and along with the profiles of any of its agents that would be using the system.
Energycentric.com would work with the supplier to establish a catalogue. Craft explained: “This would be a very simple process for those who already have digitized catalogues. We would create one for those who did not have digitized catalogues.” Suppliers could maintain and update the catalogue themselves.
Notably, suppliers will also be able to target promotions and pricings to specific utilities. This allows them to individually control all the relationships they have with their clients.
Craft is certain that this method of purchase will take off. “The internet and the technology we have for digitizing drawings and technical specifications, will allow the suppliers and the buyers to share data. And they do need to share this data during the bid formation process. It will allow suppliers to work online with the buyers on developing their response to requests for proposals (RFPs) and engineering specifications.
“It will also be a lot easier for the buyers to maintain a level playing field among all of the bidders during a bid. They will be able to keep the questions and answers very public to all the potential bidders.”
In addition to speeding up and streamlining the order/purchase process, Energycentric also sees an opportunity for cost savings. “Based on the experience in other industries, there could be an estimated industry saving of 20 per cent. This comes from streamlining the back office.
“The utility industry has pretty much taken out most of the cost savings in the products themselves. We don’t anticipate the internet driving product costs down but we do believe that the tools we offer will enable suppliers and sellers to make back office purchasing, order fulfilment practices, and even sales channels, much more efficient.”
Energycentric.com is, however, more than just a site for buying and selling equipment. Services will be on offer and there will be educational content on new technology and techniques related to the products and services being sold.
Energycentric is not the only company targetting the electricity industry as a new market for B2B e-commerce. In the USA, a group of 15 utility companies are coming together to form an online marketplace with the launch of a single site. Craft sees this competition as good news, bad news. “The utility announcement has essentially validated the market for us. When we talk to potential clients, there is no longer the issue of how valid this concept is. This helps to speed us along.”
Energycentric claims to be at a more advanced stage than the utility venture. It plans to be up and running in the third quarter of this year. “We are now talking to utilities and suppliers who would like to be online late this summer. The 15-utility venture plans to to have its site up and running by the end of this year.”
Across the Atlantic, European utilities are also moving in a similar direction. Three of the UK’s biggest utilities recently announced a plan to launch a pan-European internet-based web procurement business. The move will see the creation of a major internet portal and a buying consortium.
Scottish Power, United Utilities and Northern Electric have formed the portal to move transactions with suppliers online and plan to take advantage of the portal by buying together in bulk.
The consortium will be headed up by Ken Vowles, a Scottish Power director, who will be chairman of the consortium. Establishing the consortium and the internet business is expected to cost £20 million. It still has to be decided where it will be based.
According to Scottish Power, the logic is to pull the resources together and utilize the internet to create savings by economies of scale, by share warehousing and by bringing together standards of purchasing. The companies claim that the process will result in faster and more efficient transactions as well as reduced costs.
The three companies, which buy vast amounts of cables, pipes, switchgear, transformers and other supplies, expect to achieve savings of at least ten per cent by combining their purchasing power and buying through the internet.
The initiative began as an attempt to meet new price caps recently introduced by the Office of Water Services (Ofwat) and the Office for Gas and Electricity markets (Ofgem), the utility regulators.
Stuart Saunders, managing director of Manweb, a subsidiary of Scottish Power, currently has the role of coordinating the project activities. He explained: “We have three interconnected networks between three companies: Scottish Power with its own area linking with Norweb and United Utilities and then Manweb linking with United Utilities. We thought that if we could get some harmonization of specifications or try to bring together the logistics involved in the supply of parts and material, there might be some kind of benefit in it for all of us. We thought that if we could make reductions we could meet the requirements of the regulator and give the customers the benefit of these reductions.”
The utilities set about doing this by looking at specifications, standards, and indeed the whole supply chain. They decided that the best approach was to use electronic means. “This immediately made us think of how we could bring together the supplier base and the market,” added Saunders.
An e-business solution was the obvious solution. “The opportunities become greater when considering the value that can be added. You can get real flexibility of operation from the speed at which information is available. It also gives manufacturers the flexibility to minimize production costs and the purchasers have the opportunity to fit into this. It will essentially harmonize the market and supplier.”
In addition to purchasing products, the consortium sees the opportunity for online services. “This could encompass a whole range of activities: from the provision of turnkey operations to trenching and underground cabling, which would involve contractors. These are just one or two examples,” explained Saunders.
The three companies are now in discussions with other large European utilities over the establishment of the new internet portal in which the three companies will own a 51 per cent stake. Other shareholders will include IBM and PricewaterhouseCoopers. According to the three companies: “The intention is to develop a major e-business which could eventually be floated.”
Saunders stressed the importance of volume and the need to have a system up and running which is attractive to as many manufacturers and suppliers as possible in the widest possible market.
Accordingly, other European utilities will be invited to join the consortium by advertising their combined purchasing requirements on the web. Suppliers will then be expected to bid against each other for orders.
“We have had a tremendous response from the European utilities. We are in discussions with a variety of European utilities which cover most of western Europe. The large players are there. The Nordic countries are also involved,” said Saunders.
The portal will operate as an independent entity and create an electronic market to simplify transaction processes, improve information flows and increase speed of delivery. The portal will be open to participation by any company in the utility sector.
United Utilities chief executive John Roberts said: “We hope to encourage other utilities to join us. We are three big utilities with a lot of purchasing power – up to £1.6 billion ($2.5 billion) of materials per year. We would like to bring others in so that we can double this.”
Discussions on the structure and membership of the portal are now underway. A spokesman for Scottish Power said: “We’re busy setting out a business plan and finalising requirements.”
Work streams are ongoing to see how the system can be developed. There is a technical work stream to develop the architecture behind it; and a strategic work stream, which is talking to interested parties about how they might become involved. “For example we are discussing whether they can see a usefulness in becoming an equity partner or whether they would like to be a subscriber,” noted Saunders.
There is also a group looking at the commercial aspects. There are a number of models that could be applied to how the system would be used and payed for by users. Options include paying to use the system on a transaction basis; or a flat fee basis or perhaps a combination of the two.
Like the Energycentric venture, manufacturers and suppliers would have electronic catalogues on the portal. One of the technology challenges facing the consortium is to make sure the software that is used in each of three companies can actually access the internet. Saunders noted: “Technology partners have yet to be chosen. The group is looking at a number of options which we are evaluating at this stage.”
The consortium intends to begin internet trading in July this year. At this time, the venture could become Europe’s biggest online procurement business.
Sue Craft, the founder and CEO of Energycentric.com: All types of T&D equipment and services will be available through the website
Stuart Saunders of Manweb: Trying to bring together the logistics involved in the supply of parts and materials