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National - Importance of Financial Strength of Retail Energy Suppliers
By GDF SUEZ Energy Resources NA
Marketing Analytics
The financial strength of suppliers
has emerged as a major consideration for business owners, as the
credit crunch of the past year has shown just how vulnerable
companies can become to a downgrade in the financial strength of
their supply chain. Supplier credit concerns extend to energy
suppliers as well. In 2008 and 2009, a mix of Retail Energy
Providers (REPs) went through financial transitions that left
their customers stranded and forced to navigate new
relationships with other providers.
All of which presents
customers with a pair of questions:
How financially healthy
is your REP? And how does the financial strength of your energy
supplier impact your bottom line?
Selecting a supplier with a
strong financial rating is always a key issue. In the current
economic times, however, it is even more crucial. Doing business
with a strong REP provides the confidence that the electricity
supply contract just completed will be fully honored throughout
the term of the agreement.
Over the past two years, some REPs
with weak financial positions ceased their retail business and
either sold their customer bases to other suppliers or are
winding down their business by not renewing their expiring
agreements. Others have struggled financially, which in turn
depleted their ability to compete in the marketplace by limiting
their ability to offer fixed-price products or limiting
contracts to short terms. Some customers have even unexpectedly
been dropped by their supplier and returned to supply by their
local utility at Standard Offer rates.
The financial
strength required in highly competitive markets allows an REP to
provide a robust offering of services that go beyond just the
price of power. A strong balance sheet allows a supplier to
provide a portfolio of products and additional customer services
that make life easier for the buyer. One service allows
guaranteed enrollment for customers switching between suppliers.
This protects them from excess charges due to missed start dates
and from incurring rollover costs for energy by their existing
supplier. Solid financials allow an REP to offer this guarantee,
which will make the customer whole if they are not switched
according to the contracted date.
Credit ratings of the REP
are critical to their business, but affect the retail customer
in the long run as well. Most REPs purchase power from others –
either third-party generators or other wholesalers – for resale
to their customers. Wholesalers conduct business with REPs with
sound financial backing. Providers with weaker balance sheets
may find it challenging to secure power to fulfill their
contracts. Wholesalers may also charge a risk premium to sell to
an REP with a weaker credit rating, a charge that will be passed
along to the customer. This will add significant cost to the
price they offer the end-use customer.
Another benefit of a
strong balance sheet is the ability to offer longer-term deals.
An REP with a lesser balance sheet may choose shorter terms for
their customers. Often these REPs require the customer’s credit
rating to be strong in order to offer longer terms on
agreements.
A lesser credit rating could also cause an REP
to not offer fixed-price contracts. This is due to the cost of
the energy purchased for future delivery an REP must hedge their
purchases. Hedging cost for energy purchases can be costly for
REPs with poor credit. On the other hand, REPs with strong
balance sheets can arrange for these services, and thus provide
more optimal pricing.
Given the importance of solid credit
ratings for REPs, research was done to review the credit ratings
of the KEMA Top Ten Non-Residential REPs:
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