B2B Contract Pricing Best Practice: Reducing contract risk while protecting supply margins

Publication Date	August 2005
Publisher	Datamonitor
Product Type	Report
Pages	30
ISBN Number	not applicable
Product Code	DAT00541

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Summary

Introduction

A "Standard Model" has emerged for B2B energy contract pricing, which hinges on competitive pricing of fixed-price, fixed-tem contracts through a competitive tendering process. This brief presents Datamonitor's analysis of the Standard Model, including actionable recommendations based on the current best practice in the model's implementation and on a discussion of its inherent limitations.

Scope

Analysis is based on Datamonitor experts' many years' work in the area of energy utilities generally and of energy procurement in particular.
Reflects in-depth telephone interviews with high-level utility executives in leading EU energy markets, such as the UK, Germany, Sweden and Austria.
Supported by a survey of over 2,000 UK major energy buyers conducted over the last 12 months, and by similar earlier surveys in other key EU markets.

Highlights

The key to profitable B2B pricing is risk allocation that reflects both the supplier's and the customer's risk profiles. If applied correctly, the standard pricing model does that for many categories of customers.

However, the Standard Model rests on some strong assumptions about the customer's energy usage, which will come under increasing pressure as markets become more volatile and large customers grow more sophisticated.

Reasons to Purchase

Understand the main trends in the area of B2B energy pricing and what they mean to your company's profitability.
Gain insight into the current best practice as revealed by key industry executives in some of western Europe's leading utilities.
Assess the actionable recommendations developed by Datamonitor experts in light of your company's special circumstances, and apply them appropriately.

Content

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