Pricing 101 - Part 3

July 11, 2024

Pricing 101 - Part 3

Part 3 of the Pricing 101 series examines pricing for industrial and commercial customers, discussing the additional complexity compared to residential pricing and the challenges that this brings to energy retailers.
July 11, 2024

Pricing 101 - Part 3

July 11, 2024

Welcome to part 3 of the Pricing 101 series. If you haven't read the previous parts yet, find them below:

Pricing 101 Part 1

Pricing 101 Part 2

Part 4

Part 2 of the series examined pricing for residential customers. In part 3, we will look at the other side of pricing: pricing for industrial and commercial customers. Though there are many similarities between the 2, the larger scale of a business compared to a household introduces greater complexity into the tariffs that can be offered and the components of a customer's electricity bill.

Energy Pricing for Industrial & Commercial

Industrial and commercial customers (C&I) might have different purposes to residential ones, but the fundamentals are the same: they consume energy from the grid and pay for what they use. What makes C&I different is the amount of consumption and variations in usage profiles. A large factory or a data center consumes so much energy that it makes sense for retailers to offer bespoke deals and for grid costs to be more precisely calculated.

Components of C&I Energy Bills

  • Energy Supply
  • Demand Charges
  • Power Factor Penalties
  • Taxes and Fees
  • Riders

The first difference you will notice for a C&I customer is demand charges. A demand charge is simply another word for the costs of transmission and distribution, but rather than a flat fee, demand charges are based on the maximum rate of energy consumption. The higher this figure, the more infrastructure that is needed to supply C&I customers. Demand charges are based on the peak demand that occurs, which means spikes in demand can have drastic impacts on the bills that a C&I customer pays, even if their consumption hardly ever reaches the peak.

Power Factor is a bit more complicated, and relates to how alternating current interacts with the equipment at a C&I site. A lower power factor means that the utility has to deliver more total power to properly supply equipment. Utilities will penalize businesses that have a low power factor with extra charges. In ERCOT, a low power factor is penalized with a simple increase to billing demand, calculated as follows:

Billed Demand (kW)= Metered Demand (kW) * (0.95/pF)

Taxes and fees will not be dissimilar to residential customers, though there may be tax relief options or additional business taxes. Both businesses and customers will also pay Riders where utilities apply them.

Rate Structures for C&I

The rate structures available to C&I customers are not dissimilar to those on offer to residential customers: there will still be fixed rates and variable rates, but there are many additional options, such as rates which allow for curtailing use during peak demand. 

The primary difference is that residential customers are largely choosing off-the-shelf tariffs with limited customization, while C&I customers can negotiate much more bespoke deals. C&I customers also have more ability to participate in the wholesale market. Retailers offer products with individual components of the energy supply cost passed through to the customer rather than being fixed for the term of a deal.  

Strategies for managing energy costs as C&I customers

Energy Audits and Efficiency Improvements

Conducting comprehensive energy audits is the first step in managing energy costs. Implementing these improvements can result in substantial energy savings and lower utility bills. Regular maintenance and monitoring further ensure that systems operate at peak efficiency, preventing energy loss over time.

Load Shifting and Demand Management

Load shifting involves moving energy consumption to off-peak times when rates are lower. This can be achieved through automated systems that control energy use based on time-of-day tariffs. Demand management goes a step further by reducing overall energy consumption during peak periods, either by temporarily shutting down non-essential processes or using energy storage systems. These strategies not only reduce energy costs but can also qualify businesses for lower demand charges from utilities.

Avoid Power Factor penalties

Most factories will have low power factors due to the nature of the equipment used in production. They can mitigate this by installing capacitors, both static and dynamic.

On-site Generation 

Investing in on-site generation, such as solar panels or combined heat and power (CHP) systems, allows businesses to produce their own energy. This reduces reliance on the grid and can provide significant cost savings.

Contract Negotiation and PPAs

As C&I deals are heavily tailored, there is a lot more room to engage in negotiation and seek a better deal, relative to residential customers. 

Businesses can also seek to negotiate directly with generators through PPAs. Some types of PPAs are offered through retailers, in which they facilitate businesses purchasing wholesale electricity through a more traditional retail structure, but most PPAs are done directly between large C&I users and generators.

Difficulties in pricing for C&I

Pricing for C&I customers is much more involved than for residential, with far more flexibility in the products that can be offered and much greater variance. Approaches to pricing for large business and small or medium sized businesses may differ. Energy suppliers will typically have a matrix of prices (also known as a pricebook) for SMEs that are sold through brokers, while bespoke offers will be available for the larger firms.

The greater level of complexity places more stress on pricing teams but it also means more opportunity. 

The challenges for C&I pricing are ultimately very similar - technologies that are outdated and not designed for energy pricing. Bespoke prices for C&I customers can involve multiple sites and meters, and all of this complexity adds up to very lengthy pricing processes. Existing solutions can take days or even weeks to generate a quote, which results in lost deals and an inability to react quickly.

Not only is tooling slow, it can’t even deliver the accuracy that such quotes need and results can often be unexplainable. Tools can be black boxes which (eventually) spit out results with no traceability. They can’t work with meter data, which means they need to work with price assumptions and based on aggregated data. This leads to easily under- or overpricing, reducing competitiveness or eating away from profitability.

There is a lot more room for human error as well. Even after a sale has been made, teams lack insight into financial performance as the per deal data simply isn’t tracked within the broader portfolio making it difficult to access or analyze.

For matrix pricing, speed is again the main concern, with uncompetitive prices often remaining long after they should have been removed. Teams are limited in the amount of tariffs they can generate; the more tariffs they can create, the more they can tailor to specific customer profiles. Suppliers that can react the quickest to intraday changes in energy markets and offer a greater number of tariffs to suit different customer profiles can be sure they are putting the most competitive prices out at any time and to anyone.

How Gorilla solves problems in C&I pricing

Gorilla offers several applications designed for C&I pricing, enabling the rapid creation of bespoke prices, PPA quotes that can be offered in minutes, and an easy, automated system for matrix pricing. Every retailer is ultimately looking for the same three things: flexibility, accuracy, and performance. Most current solutions can fulfil one or two of these but achieving all three has been a pipe dream - that is, until Gorilla came along. Gorilla’s data cloud is highly flexible while still being extremely powerful out-of-the-box, which means teams can start producing business value from Gorilla without lengthy implementation projects. Request a demo today to see the difference that Gorilla can make for your pricing team.

That concludes part 3 of the series. We’ve looked at the makeup of energy bills for  C&I and discussed attempts to keep bills lower for customers. We’ve also examined the specific difficulties that the sector faces to produce tariffs that can maintain margin and remain competitive.

Pricing 101 - Part 4

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