TMT: How are energy brokers paid?

December 17, 2019

Video Transcript

The topic for today is: How do energy brokers, agents, or consultants get paid?

It’s one of the most frequently asked questions that we get. So today, I want to open up a discussion so that you understand better how the process works.

There are 2 ways that we get paid. But first, let me explain that I’ve been doing this business for over 27 years and I’ve been involved in literally thousands of transactions. And I’ve worked with many other agents and brokers in this industry. So what I’m about to tell you is established as common practice.

How Energy Brokers Are Paid

1) Directly from the Supplier

Suppliers send us a commission check every month. The amount we get paid is a function of the margin rate that was established on the deal and the volume that was used in the previous month, whether that be gas or electric.

This method accounts for 98% of all the transactions in this marketplace.

2) Payment from the Client

The other way that accounts for a very small percentage is when a client pays the broker directly some kind of negotiated fee.

It is implied that when a client works directly with an energy broker that the broker is also not getting paid by the supplier. It’s a very bad practice in our industry, though, where often times the broker gets paid by the customer and then also gets paid by the supplier.  That is NOT best practice.

How Margin is Split Between Broker and Supplier

So let’s look at what’s included in the broker mark-up. Suppliers have minimums that they need to receive on any kind of transaction.

So how are minimums established?

First, suppliers are going to look at how big the load is. The bigger the load, the lower the margin that suppliers are willing to accept. The price that they’re going to put on it is so that they can receive a reasonable return and also cover their fixed costs with a transaction.

In almost every instance, a best practice in our industry is that the margin is split 50/50 between the broker and the supplier. So, if at the end of the day the mark-up on an electric deal is $.002 per kWh, $.001/kWh goes to the broker and $.001/kWh goes to the supplier.

What goes into a Broker’s Margin?

Let’s look at what goes into what the broker establishes as the margin.

The broker has to recover their sales and fixed costs. On the fixed cost side, there are several things we have to consider that could add to our cost for the transaction:

  • The complexity and size of the transaction. If it’s a larger load, the broker is less inclined to put a bigger margin on it.
  • Multiple locations
  • Auction was being performed
  • Custom contract negotiation: this requires more of our time to finish the transaction.
  • Competition at your location: Let’s say you have another broker shopping against us. Part of your evaluation of who you’re going to use is both their price but also their services. And those services are sometimes difficult to put a value on. But it’s something that we’re sensitive to when we’re pricing a deal.
  • Cross-Sell Opportunities: If we’re selling you electricity in this transaction but you’re also a big gas user or you’re considering demand response or efficiency projects, this weighs into our margin considerations.
  • Growing/Shrinking Load: For instance, let’s say you’re currently using 1 million kWh this year but you’re about to add some new production lines that will increase your usage to 4 million kWh. What we’re going to do is price it more competitively in anticipation of that bigger load.

Will an energy broker tell you their margin?

An energy broker typically does not disclose their margin in writing. It very much mirrors how the insurance business works.

If you would like it in writing, you are more than welcome to ask for it and, if necessary, a broker will put it in writing. The problem is, what they put in writing might not necessarily be what they are actually receiving. So this boils down to a matter of trust. You have to have a high degree of confidence and trust in the agent or broker that you’re using to ensure that you’re getting a fair deal.

Have more questions about energy brokers?

Thanks for watching! If you found this helpful, please like or share this with others. And, as always, if you have any questions about how a broker gets paid, feel free to reach out to us directly.

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