An open energy auction is an online bidding event, usually run by an energy broker on an energy management platform, in which retail electricity or natural gas suppliers compete for a customer’s supply contract. Most are reverse auctions: suppliers underbid each other within a set time window, and the buyer picks the offer with the best overall terms, not always the lowest price.
Key Takeaways
- In a reverse energy auction, one buyer (or a broker acting for a group of buyers) invites many suppliers to bid, and prices typically fall as suppliers underbid each other.
- In the US, business energy auctions are only possible where retail choice exists: according to a March 2023 EIA analysis, 13 states and the District of Columbia have active residential retail choice programs, not counting Texas, where retail choice is mandatory.
- Brokers usually do not charge up-front fees; their commission is commonly built into the unit rate the customer pays, known as an uplift.
- Government renewable energy auctions are a different mechanism: developers bid a price per unit of electricity for long-term contracts, and many countries now use them instead of fixed feed-in tariffs.
- The lowest rate is not always the best deal: check whether the price is fixed or variable, the contract length, cancellation fees and what happens when the term ends.
Energy deregulation, also called retail choice, increased competition among energy suppliers in the US states that opened their electricity and natural gas markets to competitive retail suppliers. Open markets also attracted aggressive sales tactics and confusing offers, which is why state regulators such as the Pennsylvania Public Utility Commission publish shopping guidance and contract rules for customers. One of the biggest achievements of the deregulated marketplace was the use of energy management systems that augmented the existing workflow of brokers, suppliers, and small business owners.
Many energy management systems feature proprietary software that conduct open energy auctions and reverse auctions between energy brokers and suppliers. While each platform is different, the basic idea is that brokers can place pricing opportunities in the EMS with a set of given criteria for suppliers to view and bid on.
This application is very similar to open market auctions held across the world for commercial energy investments. In government renewable energy auctions, developers compete on the price per unit of electricity, and many countries have used them to replace or supplement fixed feed-in tariffs; Germany, for example, began setting support rates for ground-mounted solar by auction in 2014.
The main benefit for consumers using an energy auction is that it enables them to navigate the market to find the best prices and service.
Another application of energy management software is the ability to conduct online reverse auctions. While customers typically bid for goods in an open auction, reverse auctions switch the playing field so that suppliers bid on customer contracts.
Brokers can invite suppliers to bid on pricing opportunities within a defined window. Depending on the state, this can include electricity, natural gas, or renewable auctions. This service is usually available for both individual and aggregate contracts.
This application incentivizes suppliers to place the most competitive bids as they have to go up against other suppliers in a limited time frame. This benefits brokers by helping them find the best contract for their customers while reducing the need for cold outreach and one-to-one negotiation.
This benefits suppliers as well by giving them the opportunity to reach more customers on the broker’s behalf.
The broker and supplier can improve their working relationship using these software systems, thus providing greater service for the customer.
Energy management software usually comes equipped with invoice data and other account information, such as account load and previous cost factors, so that suppliers and brokers can use this information to create the most appropriate bids.
One thing to keep in mind for small businesses is that the lowest price does not always equal the best offer. There are often hidden contingencies and confusing language that could end up costing customers a lot more than their initial listed rate.
This reinforces the importance of working with an energy consultant to find the best deal for your business and also get the best service.
What Is the Difference Between an Open Auction and a Reverse Energy Auction?
A reverse auction is a type of auction in which the usual roles of buyer and seller are reversed: there is one buyer and many potential sellers, and prices typically decrease as the sellers underbid each other. In an ordinary forward auction, buyers compete by offering higher prices. Energy platforms use the term “open auction” loosely, but for a business buying power or gas, the event is almost always a reverse auction in which suppliers compete for the contract.
| Auction type | Who bids | Direction of price | Typical energy use |
|---|---|---|---|
| Forward (traditional) auction | Many buyers | Rises as buyers outbid each other | Rare for retail energy contracts |
| Reverse auction (broker-run) | Many retail suppliers | Falls as suppliers underbid each other | Business electricity and natural gas supply contracts in retail choice states |
| Government renewable energy auction | Project developers | Developers bid a price per unit of electricity | Long-term contracts for new solar, wind and other renewable capacity |
How Does a Broker-Run Energy Auction Work, Step by Step?
- Gather the account data. The broker collects recent invoices and usage history, such as account load and past costs, so suppliers can price the contract accurately.
- Set the criteria. The broker defines the commodity (electricity, natural gas or a renewable product), the start date, the contract length and whether the price should be fixed or variable.
- Invite suppliers. Retail suppliers that serve the customer’s utility area are invited to bid, either for a single account or for an aggregated group of accounts.
- Run the bidding window. Suppliers submit bids within a time limit. In real-time online bidding, the price falls as suppliers try to beat each other while still meeting the contract specification.
- Compare full offers. The broker presents the bids side by side. A buyer may award the contract to the lowest bidder or to a supplier with a higher price that offers better terms.
- Sign and switch. The customer signs with the chosen supplier. The local utility continues to deliver the energy over the existing grid; only the supply contract changes.
Software vendors often advertise large savings from reverse auctions. Wikipedia’s article on reverse auctions notes that many reverse auction providers report an average price reduction of 18 to 20 percent after the initial auction, but that figure comes from the providers themselves and covers procurement in general, not energy specifically.
Where Can You Use an Energy Auction in the US?
An energy auction only makes sense where customers can choose a retail supplier. In states with retail choice programs, customers can buy electricity from a retail energy supplier instead of the local utility, and the utility still delivers the power through the grid.
- According to a March 2023 analysis by the US Energy Information Administration (EIA), 13 states and the District of Columbia have active statewide or districtwide retail choice programs for residential customers.
- That count does not include Texas, where the EIA notes retail choice is mandatory under state law.
- Four other states (Michigan, Nevada, Oregon and Virginia) have limited retail choice that is largely available only to non-residential customers.
- The EIA reported that in 2021, 26% of eligible customers, or 13.2 million US residential customers, took part in their state’s retail choice program.
Rules differ by state and by utility, so business owners should check which supplier and contract options their state utility commission allows before running an auction. Outside the US, retail markets work differently; for an Australian example, see this guide on how electricity tariffs work in South Australia.
How Are Energy Brokers Paid?
Energy brokers help customers procure electricity or natural gas from suppliers, but they do not own or distribute energy themselves. Brokers typically do not charge up-front fees to provide rates. When a customer buys energy through a broker, the broker’s fee or commission is usually included in the unit rate the customer pays, which is called an uplift. Some brokers instead charge a fixed fee for consulting.
Because the commission sits inside the rate, it is reasonable to ask a broker how much uplift is included in each bid and whether it is the same across suppliers.
How Do Government Renewable Energy Auctions Work?
Government renewable energy auctions are a separate market from broker-run supply auctions. In these auctions, project developers bid the price per unit of electricity at which they can deliver a project, and the winners receive long-term contracts. According to a June 2015 International Renewable Energy Agency (IRENA) guide, more than 60 countries had adopted renewable energy auctions, up from six in 2005.
In several countries, auctions have taken over from feed-in tariffs, a policy that offers renewable producers long-term contracts with cost-based purchase prices. Germany began setting support rates for ground-mounted solar by auction in August 2014 and extended tenders to onshore and offshore wind from 2017. The UK’s feed-in tariff scheme closed to new applicants on 31 March 2019. Technology is also changing how these markets run; see how AI and technology are reshaping the renewable energy industry.
What Should You Check Before Accepting a Winning Bid?
The Pennsylvania Public Utility Commission’s official shopping site, PAPowerSwitch, gives a useful checklist; other states set their own rules, but the same questions apply:
- Fixed or variable price. In Pennsylvania, a fixed rate is an all-inclusive price per kWh that stays the same for at least three billing cycles or the contract term, whichever is longer. A variable rate can change by the hour, day or month.
- Cancellation fees. Long-term fixed-price contracts may carry cancellation fees; variable contracts often do not, but the contract decides.
- What happens at the end of the term. Unless the customer acts before the contract expires, the rate may change to a monthly variable rate.
- Renewal notices. Pennsylvania customers receive a first notice 45 to 60 days before expiration and an options notice 30 days before; taking no action can change the rate.
- Cooling-off rights. Pennsylvania gives customers a three-day right of rescission after signing, and early cancellation fees do not apply in the last 30 days of a contract.
Read the supplier’s disclosure statement for the state you operate in. Cutting consumption lowers the bill regardless of the rate; see these practical ways to save electricity, and for wider cost planning, how small businesses can adapt to a changing economic landscape.
Frequently Asked Questions
What is an energy reverse auction?
An energy reverse auction is a bidding event in which retail electricity or natural gas suppliers compete to win one customer’s supply contract. Prices typically fall as suppliers underbid each other within a set time window, and the customer chooses the offer with the best overall terms.
Can a small business use an energy auction?
A small business can use an energy auction if it is in a market with retail supplier choice. In the US, that means a state with a retail choice program, such as Texas, Pennsylvania, Ohio or Illinois, or the District of Columbia, subject to each state’s rules.
Does the lowest bid always win?
No. A buyer may award the contract to the lowest bidder or to a supplier with a higher price that offers better terms, such as a fixed rate, a shorter term or no cancellation fee.
Do energy brokers charge a fee for auctions?
Energy brokers usually do not charge up-front fees. Their commission is commonly included in the unit rate the customer pays, known as an uplift, although some brokers charge a fixed consulting fee instead.
Does switching supplier change who delivers my electricity?
No. In retail choice states, the local utility still delivers the electricity through the existing grid; only the company that supplies the energy changes.
What is the difference between an energy auction and a feed-in tariff?
A feed-in tariff offers renewable producers a cost-based purchase price under a long-term contract, while an auction lets developers compete on price. Germany, for example, began moving from government-set feed-in rates to auctions in 2014.
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