2012 Retail Energy Marketer Trends

2012 Retail Energy Marketer Trends Survey Results Presented by: www.skippingstone.com Table of Contents Executive Summary............................
Author: Abner Crawford
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2012 Retail Energy Marketer Trends Survey Results

Presented by:

www.skippingstone.com

Table of Contents Executive Summary.......................................................................................................................................................................... 1 Methodology .................................................................................................................................................................................22 About NEMA .................................................................................................................................................................................22 Personnel ............................................................................................................................................................................................33 Comments on Personnel..........................................................................................................................................................44 Business Model & Growth............................................................................................................................................................55 Comments on Business Model & Growth .........................................................................................................................88 Market Segments & Products .....................................................................................................................................................99 Comments on Market Segments & Products ............................................................................................................. 1111 Contracts & Services for Residential & Small Commercial ...................................................................................... 1212 Comments on Contracts & Services for Residential & Small Commercial .................................................... 1313 Contracts & Services for Large Commercial, Industrial & Government ............................................................. 1414 Comments on Contracts & Services for Large Commercial, Industrial & Government ........................... 1616 Technology ................................................................................................................................................................................... 1717 Comments on Technology ................................................................................................................................................ 1818

This report was prepared by Skipping Stone from survey responses provided by North American energy retailers. This report is the intellectual property of Skipping Stone and National Energy Marketers Association and may be quoted with proper citation.

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Executive Summary In early 2012, NEMA, utilizing Skipping Stone’s services, conducted a business trends survey of retail energy marketers across North America. With approximately a third of the active retail marketers responding, the results are interesting and informative, however not statistically valid from a pure market research standards standpoint. The following observations are of particular interest. •

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Overall, the retail energy marketing sector has robust growth plans for 2012 o A majority (77%) of marketers are creating jobs and plan to hire more staff o A majority of marketers (53%) are expanding their product and service offerings o A majority of marketers (53%) plan to expand into new markets o Acquisitions are planned by 25% of marketers  Interestingly none of the marketers indicated plans to sell The most significant personnel gap is in the area of sales by a factor of 5 times any other skill area gap. In a related area, some 70% of retailers have a sales channel program in place, yet a majority indicated their sales channels underperform compared to internal sales efforts. The most significant challenge to growth was competitive margins, closely followed by access to capital, state regulatory proceedings and market maturity. o Interestingly access to skilled resources ranked last as a challenge to growth While a majority of marketers offer both electricity and natural gas, there are still a number of retailers who don’t. According to survey results that number is shrinking as expansion from one commodity to offer both ranks as the highest new product offering category. Beyond core commodity products, energy services (ESCO) is the most popular area for expansion. Demand response, bundled with commodity, is not a strategic initiative for a majority of retailers as the consensus is the market is two years out, or longer, before being viable. Of the few who do offer demand response, PJM and ERCOT are their primary markets. Among mass market retailers over 25% do not offer one year terms to customers. This group overwhelmingly (87%) has not adopted, nor offers time of use rates to their customers. Among C&I marketers only 60% offer base load w/swing products, and only 40% offer hedging products to their customers. The most popular commodity product remains a full requirement offering (83%). Most retailers (70%) are investing in technology with sales management and operations/settlement listed as the most often planned purchases or upgrades. o

Over 30% list multiple market billing systems as their greatest technology challenge.

Comments and feedback on this report are welcome. Author: Tracy Morgan, Principal, Skipping Stone [email protected] 714-316-1911

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Methodology The survey instrument was designed by Skipping Stone and approved by NEMA. To assure respondents confidentiality, once collected, information about specific companies was deleted from the database. To capture as many retailers as possible, participants were contacted by email, by NEMA, through the press and via phone calls. The survey instrument utilized a web-based market research tool to enable participants to respond in private and on their own schedule. Approximately one third of the active retail marketers in North America took the survey. Given the market size and types of questions, this response rate met the expectations of the project. A satisfactory mix of retailers by size, market and customer segments served responded to enable a solid cross representation of the industry. While the specific results do not meet statistical significance thresholds for standard market research methodology, we believe the survey results provide excellent insight into the 2012 Retail Energy Marketer Trends.

About NEMA The National Energy Marketers Association is a national, non-profit trade association representing wholesale and retail marketers of energy, telecom and financial related products, services, information and related technologies throughout the United States, Canada and the European Union. NEMA leverages its broad based regionally diverse members to enhance the credibility and stature of pro-competitive regulatory positions that:  Open markets for natural gas and electricity  Unbundle competitive services from monopoly services  Implement standards that bring suppliers and consumers together at the lowest possible cost  Encourage investment in new technologies, including the integration of energy, telecom, digital communications and the internet  Encourage the proper valuation, management and disclosure of risk and ensure that energy markets are stable, reliable, liquid, transparent and financially credible You are invited to join the National Energy Marketers Association. For more information please visit www.energymarketers.com or contact us at; 3333 K Street, N.W. Suite 110 Washington, DC 20007 202-333-3288

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Personnel Figure 1. Retail Marketer Company Size Based on Number of Employees

250

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 250

Figure 2. Hiring Plans for 2012

No hiring planned

6%

18%

Add < 10 employees Add >10 employees

24%

Reduce headcount

53%

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Figure 3. Biggest Personnel Gap

Management Regulatory Risk Management Accounting/Finance Back Office/Billing Scheduling/Operations Sales 0%

10%

20%

30%

40%

50%

60%

Comments on Personnel The retail energy marketing is a growing business with 94% of the firms surveyed planning to hire staff. With 24% planning to add 10 or more employees, it is apparent that the industry is adding a significant number of jobs. With sales skilled personnel as the biggest gap by a significant (5X) margin, it is also interesting to compare this gap to the general discontent with sales channel results in Figure 10 (page 8). Given the majority of companies have growth plans; one would think addressing the sales skill gap would rank as one of the greatest challenges facing retail marketers, however in Figure 8 (page 7) personnel ranked last among all the challenges measured. Authors Observation: Given the sales skill gap, hiring plans and expansion plans, it is apparent retail marketers will need to hire personnel lacking retail energy backgrounds and then train them. In an unscientific survey on availability of energy commodity training courses, there are several options for generic energy training yet a lack of specific training for energy commodity sales.

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Business Model & Growth Figure 4. Plan to Add New Customer Segments (i.e. move from mass market into C&I or vice versa)

90.00% 80.00% 70.00% 60.00%

Yes

50.00%

No

40.00% 30.00% 20.00% 10.00% 0.00% Yes

No

Figure 5. Plan to Add New Products

Yes

No

44.00% 45.00% 46.00% 47.00% 48.00% 49.00% 50.00% 51.00% 52.00% 53.00% 5|N E M A 2 0 1 2 R e t a i l E n e r g y M a r k e t e r T r e n d s

Figure 6. Plan to Expand Into New Markets

60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Yes

No

Figure 7. Plan to Expand through Acquisition

80% 70% 60% 50% 40% 30% 20% 10% 0% Yes

No

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Figure 8. Growth Challenges (ranked lowest to highest)

Access to Skilled Resources Economic Uncertainty Rising Commodity Prices Technology Limitations Market Maturity State Regulatory Proceedings Access to Capital Competitive Margins 0%

5%

10%

15%

Figure 9. Have a Channel Sales Program in Place

70% 60% 50% 40% 30% 20% 10% 0% Yes

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No

20%

25%

Figure 10. Effectiveness of Channel Sales Program

60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Outperforms Internal Sales

Does Not Outperform Internal Sales

Comments on Business Model & Growth Expansion of additional products and services to existing customers is the preferred strategy rather than migrate from a mass market focus to C&I focus or vice versa. Solidifying core customers while increasing revenue through new products and services to the same base goes hand in hand with expanding to new territories serving like customer segments. A majority of respondents’ expansion plans are via organic methods, however a significant 25% seek to grow more quickly through acquisition. In comparison to a similar survey in the energy assets marketplace, 25% is significantly higher as a percentage of all companies in the space. Equally as interesting, none of the survey respondents is planning on selling their company in 2012. In measuring growth challenges there was no one challenge that measurably stood out. Margin pressure ranked number one, however capital access, regulatory issues and market maturity were all viewed as key challenges. Unlike many other industries, economic uncertainty does not appear to have a significant impact on retail energy marketers. Some 70% of retailers employ a sales channel strategy; however a majority of them are not seeing the results when compared to sales staff. While sales skills was viewed as the largest personnel gap, at the same time personnel wasn’t viewed as a significant challenge. Authors Observation: The obvious disconnect in M&A is the fact that 25% want to grow through acquisition, yet none of the retailers indicated a sell strategy. That will likely result in premium valuations for those willing to sell.

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Market Segments & Products Figure 11. Market Segments Served Residential Small Commercial Large Commercial & Industrial

47.06% 76.47%

Government

52.94%

88.24%

Figure 12. Product Offerings

50.00% 45.00% 40.00% 35.00% 30.00%

Electricity & Gas Electricity Only

25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

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Gas Only Green Energy/Rec's Demand Response Energy Services Other

Figure 13. Demand Response Offerings PJM NYISO NEISO

16.7% 66.7%

ERCOT CA

50.0%

16.7%

16.7%

Figure 14. Bundled Commodity & Demand Response Likelihood

60% 50% 40% 30% 20% 10% 0% Yes

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No

Figure 15. How Long Until Commodity & Demand Response are Bundled?

Beyond 24 Months

Within 24 Months

Within 12 Months

0%

10%

20%

30%

40%

50%

60%

Comments on Market Segments & Products Green Energy/Rec’s have become a somewhat common retail marketer product. Energy services appear to be the product/service expansion areas of choice while demand response has yet to take hold as a retailer strategy. In the “other” category, responses were varied and included utility bill management, solar and lighting retrofits and distributed generation. 53% of respondents indicated that they plan to add new products in 2012 (see Figure 4). The majority of those are electric only retailers adding natural gas to their portfolio with energy services a distant second. Interestingly, demand response appears to hold low interest as a growth strategy. When queried about whether the market would move to a bundled demand response and commodity offering, 59% agreed that it would. However, of those respondents, 60% believed it would be more than 2 years before the marketers would adopt that offering. Authors Observation: In light of the close relationship between commodity supply, retail load management and demand response, it’s interesting that demand response has not caught on in a more prevalent way with retail energy marketers. In a recent survey of demand response aggregators, most of them view retail commodity supply as the natural next strategic step. Some demand response aggregators are already offering supply procurement consulting services.

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Contracts & Services for Residential & Small Commercial Figure 16. Time of Use Rate Offering No Yes Only to Small Commercial

6.67% 6.67%

86.67%

Figure 17. 1-year or Longer Term Contracts for Gas & Electric

60.0%

80.00% Yes

50.0%

70.00% 60.00%

40.0%

No 50.00%

30.0%

20.0%

40.00% Only to Residential

30.00%

10.0%

20.00% Only to Small Commercial 10.00%

0.0%

0.00%

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Figure 18. Value Add Services Offered for the Residential/Small Commercial Market

90.0%

Information Services

80.0%

ESCO Services

70.0%

Asset Management

60.0%

Solar or Other Generations

50.0%

Software Solutions

40.0%

Other

30.0% 20.0% 10.0% 0.0%

Comments on Contracts & Services for Residential & Small Commercial Only 14% of mass market retailers offer non commodity value added services. The most popular value added service is providing information to customers. The survey also indicates mass market retailers are expanding into non commodity offerings, such as energy services and even insurance. As more automated or “smart” meters are being installed across the country in the mass markets, a significant utility rate trend is to shift these customers to time of use or dynamic pricing tariffs. A majority of mass market retailers have not followed suit by offering a similar product. While a majority of retailers offer one year or longer contract options, interestingly a significant number (about 25%) do not. Authors Observation: With such a low percent of mass market retailers offering non commodity services it would appear to be an area of expansion with potentially significant upside. This should be a compelling strategy given that this segment rated margin pressure as their biggest challenge.

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Contracts & Services for Large Commercial, Industrial & Government Figure 19. Complex Product Offerings (Fixed Base Load plus Swing Offering & Hedging Products Offering)

60.00% 60.00% 50.00% 40.00%

20.00%

Yes

40.00%

No

30.00% 20.00% 10.00% 0.00%

0.00% Yes

Yes

No

Figure 20. Full Requirements Product Offering

90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Yes

No

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No

Figure 21. Value Add Services Offered for Large C&I and Government (Electric) Information Services 70.00% ESCO Services 60.00% Insurance Related Products Solar or Other Generations Other

50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

Figure 22. Value Add Services Offering for Large C&I and Government (Natural Gas) (Fixed Base Load plus Swing Product Offering)

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Yes

No

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Figure 23. Natural Gas Large C&I and Government - Full Requirements Product Offered

60% 50% 40% 30% 20% 10% 0% Yes

No

Figure 24. Natural Gas Large C&I and Government - Hedging Product Offered

60% 50% 40% 30% 20% 10% 0% Yes

No

Comments on Contracts & Services for Large Commercial, Industrial & Government For marketers focused on the C&I sector, 46% are offering value add services. Like mass market focused retailers, information services ranked highest with energy services not far behind. This sector also provides more services in the way of asset management and on site generation related offerings. A majority of C&I marketers offer both electricity and natural gas. Among those who just focus on natural gas, fewer offer value added services to customers. A surprisingly large number of marketers do not offer either hedging related products or base load with swing contract structures. Not surprisingly most marketers offer a full requirements product and manage customer load and swing risk internally. Authors Observation: With most marketers managing commodity portfolio risk on full requirements offerings, it would seem a natural expansion of risk management optionality to combine full requirements with some form of customer premise peak load flexibility through demand response like offerings.

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Technology Figure 25. Plan to Invest in New Technology in 2012 No Yes

Yes

No

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Figure 26. Types of Technology Planned for Purchase

Other Utility Bill Management Operations and Settlement Sales Management Data Management Load Forecasting CRM 0%

2%

4%

6%

8%

10%

12%

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14%

16%

18%

20%

Figure 27. Largest Technology Challenge

Other

Data Management/Automation of Inbound Data

Sales/Channel Management

Data Intregration

Multiple Markets/Billing Systems

0%

10%

20%

30%

40%

Comments on Technology Energy marketers have a significant appetite for technology with 77% having technology procurement plans in 2012. The types of technology investments are spread fairly equally between Operations and Settlement, Sales Management, Data Management and CRM. Interestingly while multiple market billing is listed as the largest technology challenge, at the same time billing systems ranked low as a planned technology investment, Authors Observation: It isn’t surprising to see a lower investment in billing as typically new retailers invest in billing technology fairly quickly after launch. At the same time the high challenge score for billing is an indication that multiple markets with varying rules is a challenge that has not been solved to retailers satisfaction.

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