EXECUTIVE SUMMARY
A “Standard Model” has emerged for B2B energy contract pricing, but to be successful, it requires flexible application
The following key best practices would lead to more effective and profitable customer targeting
These findings are based on a combination of Datamonitor’s energy markets expertise and extensive primary research
CHAPTER 1 INTRODUCTION
Brief subject area, motivation and target audience
Brief structure and contents
CHAPTER 2 THE “STANDARD MODEL”
A “Standard Model” has evolved for competitive energy contract pricing
The majority of B2B customers currently prefer the security of traditional fixed-price, fixed term contracts
In a liberalised market, pricing that reflects the true market cost of energy is key to winning and retaining profitable business
Price uplifts are required to reflect the residual risk to the supplier in servicing the contract
Quotation risk
Load forecast risk
Balancing risk
Summary
CHAPTER 3 IMPLEMENTATION OF THE STANDARD MODEL
Implementation of the Standard Model seeks to offer the most competitive headline price by minimising residual supplier risks
There are two main approaches to producing quotations against a retail load curve: structured and vector pricing
Structured pricing
Vector pricing
Transfer Price Matrix
Load forecast risk can be effectively managed within the Standard Model
Accurate load forecasting
”Seasonal time-of-day” contract structures
Limiting the time-validity of the firm transfer price is key to managing quotation risk
Strategies for managing balancing risk vary depending on the size and value of the supplier’s portfolio
Small suppliers
Medium-sized suppliers
Large suppliers
CHAPTER 4 BEST PRACTICE AND LIMITATIONS OF THE STANDARD MODEL
Pricing experts and opinion leaders identify best practices and limitations of the Standard Model as employed by EU utilities
Best practices
Limitations
The common assumptions about the client’s future load profile will increasingly come under pressure
CHAPTER 5 ACTION POINTS
Datamonitor believes that the following key best practices would lead to more effective and profitable customer targeting
CHAPTER 6 APPENDIX
Methodology
Selected quotes from executive interviews
Further readings
Research contacts
LIST OF FIGURES
Figure 1: The Standard Model involves the transfer of a firm market-based price from Trading to Sales
Figure 2: The principal energy pricing mechanisms engender different combinations of price volatility and attribution of risk
Figure 3: Both under- and over-pricing destroy profit margins
Figure 4: Structured and vector (matrix) pricing are the principal quotation-producing mechanisms within the Standard Model
Figure 5: The quoted price (commodity only) includes three elements
Figure 6: Several types of adjustments must be made to historic load data in order to produce a reliable load forecast
Figure 7: Between 2-9 STOD bands are commonly used in the UK
Figure 8: Time validity of contract offers is not correlated with contract length
Figure 9: Some key assumptions behind the Standard Model will come under challenge from evolving market conditions, 2005-08
