Conducting RFPs (Request for Proposal) for procuring commodities and services is an established practice, many times a mandate of the organization. But what many have found is RFPs are not the best tool for the procurement of electricity. Why? Electricity prices are like the stock market. There can be huge swings and short deadlines which presents a challenge for even the most savvy energy buyer. In many cases, energy prices are only good for a few hours. RFPs can be an inflexible tool when it comes to making decisions where precise timing is a key component.
The two most important questions in electricity procurement are:
1. “Is now the right time to buy?”
2. “Is this price the lowest price available?”
An RFP cannot effectively answer these questions. Here’s why:
1. RFPs focus on the process, not the final price
The focus of an RFP should be on picking the right supplier to partner with, and securing the best final pricing. It should not be a result of which supplier is willing to invest more in the RFP response. An RFP is extremely time intensive and produces reams of paperwork. This impacts both parties and we all know that these costs must be recouped somehow.
2. RFPs are not time sensitive.
Effective energy management more often hinges on when to buy not how to buy. If the RFP process places the buy window when prices are peaking, the lowest price at that time may be much higher than if you had written the contract a month earlier or later. Timing is everything in today’s energy markets. By nature, RFPs are not geared for quick, informed decisions.
3. RFPs force you to choose a supplier before knowing the final price.
Even though the process is designed to facilitate a competitive bid situation, RFPs can have the unintended result of driving buyers into a “single source” negotiation. Why? Because although a “preferred supplier” is identified through the process, the final energy contract still needs to be negotiated. Because of the variable nature of the market, a refreshed price would need to be obtained, which would not be subject to competitive bids.
4. RFPs don’t end up getting true apples-to-apples pricing.
As mentioned above, even though the RFP process results in competitive bids being generated, the unintended effect of the RFP is that the “winning bidder” will still need to get refreshed pricing based on daily fluctuations of the market, and when doing so would be removed from the scrutiny of an apples-to-apples comparison with other bidders. This result is the opposite of a competitive bid situation.
5. RFPs limit competition.
Even though the RFP has become a standard in many types of procurement, many vendors avoid it because of the reasons above and because the process is long and laborsome. Unless they are willing to invest a lot of time and money in the process with no guarantee of success, many may choose to pass on the invitation to submit. This may end up excluding suppliers that would have made the best partners, and limiting the number of competitive bids you receive.
In conclusion, when procuring electricity, it is debatable whether an RFP is the right tool for the job. Not only is the process outdated, but it puts more emphasis on the process than on the final results. The intended outcome is a competitive bid situation, yet the process in thwarted by a volatile energy marketplace. A more strategic and agile approach is to deal with an independent broker who will keep you abreast of the market and conduct an “internal RFP” on your behalf, bringing several competitive bids to the table at the exact time the market is right. The result is being able to definitively answer “Yes” to the two most important questions in electricity procurement:
Is now the right time to buy? Is this price the lowest price available?
There are over 300 electricity providers in the U.S., but only one Texzon. Since 2002, as one of the industry’s most respected independent brokers, Texzon Utilities has helped companies of all sizes make well informed, strategic decisions regarding their energy purchases, producing savings that track to the bottom line.