What Should I Look For In An Energy Broker?

Energy brokers help their commercial clients line up supply in markets that have been deregulated, i.e., permit third party suppliers to offer electricity and natural gas supply contracts as an alternative to utility supply.

Sophisticated consumers could find energy supply themselves, without the help of a broker.  See How to Find Supply Without a Broker.   However, they may find that working with a broker not only saves them time but provides insight into how other commercial consumers view prices and the timing of energy hedges.

There are hundreds of brokers willing to assist in finding energy supply.  They are not equally reliable.  Brokers should be evaluated for several important factors:

1. It’s Not Just Price, Stupid.

Good brokers do not simply find the lowest price.   That’s the easy part.  Brokers should also look for the following:

  • An appropriate supply contract structure.    Fixed or floating?  (See Which is Better:  Fixed or Floating Price.)  Fixed with a cap?  Seasonal fixed (e.g., winter) and floating for balance of year?  Option.
  • Term of contract.  Most brokers routinely price up 6, 12 and 24 month contracts. But these terms may not be optimal.   Both forward prices and client volumes vary by month.  Prices are based on weighted averages for the term.   The weighted average is based on the forward price curve times the volume.  A customer with flat volume (manufacturer, pizza shop) will want to take advantage of as many low price months as possible; likewise a customer with electric heating demand in the winter may wish to include a couple summers when the volume and prices are low.
  • Contract expiration. A contract that expires in October will mean that on renewal a consumer will be paying winter prices which in some parts of the country are high for both electricity and natural gas.
  • Supplier Credit.  What good is a fixed price contract from an undercapitalized supplier with a weak balance sheet that may go bankrupt the minute prices spike?

2. Broker Fees

How much are you paying your broker?  See How Do Commercial Energy Brokers Get Paid?  The fee should be proportionate to the service.  If the broker is helping you understand your energy bills, evaluating different contract structures (described above), and assessing the risks of market timing you should be prepared to pay more than if the broker is simply gathering prices.

3.  Avoid Conflicts of Interest.

Is the broker’s compensation limited to the fee you are paying?  Or does the broker receive additional benefits from suppliers?  See How Do Commercial Energy Brokers Get Paid? for a discussion of some of these additional benefits that can create a conflict of interest for your broker.

4.  Market Intelligence.

Does your broker provide you with insight into how prices are determined as well as recommendations for when you should lock in prices?  No broker has a crystal ball on future energy prices.  But your broker should have a basic knowledge of the energy supply industry.  Examples of information that can be useful to you:

  • Historical data on price ranges in recent years. These will help you assess whether the pricing environment has more upside than downside.
  • Factors that drive prices. Does your broker understand the drivers of electricity prices, for example:  Natural gas prices, competing fuels, scheduling of nuclear power plant outages, adequacy of pipeline capacity.

5. Understanding of supply business

Does your broker understand how the suppliers quote their prices?  Failure to push back against quotes or evaluate alternative pricing structures can result in significant additional costs.  Your broker should not just be a “price taker” but should be negotiating with suppliers on your behalf.

6.  Multiple supplier relationships.

Some brokers have only a few supplier relationships.  Indeed, that is the biggest risk for commercial clients:  How can prices be truly competitive if only a handful of people are competing for the clients’ business?

Your broker should have at least 5 or 6 good client relationships.   To some extent the number and quality of these supply relationships is a good index of the quality of the broker.  The largest suppliers will not approve contracts with brokers they do not trust or do not have experience in the energy markets.

Clients should feel free to ask their brokers who they deal with.  A good broker will not hesitate to share the names of his major suppliers.