How Do Energy Brokers Make Money?

electricity-rates

What you need to know about electricity rates, energy deregulation, your energy broker and how he is compensated before you sign that next contract.

If you’re like most business owners, you receive many phone calls and cold calls by energy salespeople trying to sell you lower electricity rates. You may even be working regularly with an energy broker, or energy “who knows what” to secure lower energy rates.

But how do electricity rates work? Glad you asked…

  • Energy Suppliers purchase electricity from the wholesale market and resell it to you for a profit. You can find a list of licensed Energy Suppliers on your state’s public utility commission website. Here is a list of licensed electricity suppliers in Pennsylvania.
  • Many suppliers, instead of hiring salespeople, work with Energy Brokers to get new customers.
  • Suppliers give Brokers a rate with their margin already built in. The Broker then has the freedom to add a “Broker Fee” to the rate. The final rate to you, looks something like this…

$0.060 / kWh (supplier rate) + $0.005 / kWh (broker fee) = $0.065 / kWh (customer rate)

This is normal business, right? Well, the existence of “middlemen” is justified by the value they bring to a supply chain. A hospital network might deal with a distributor for janitorial supplies. In exchange, the distributor offers a level of service to the hospital. The hospital might call the distributor when there’s a problem, rather than dialing up the manufacturer who probably won’t help. The janitorial supplies distributor earns his keep by providing customer service in this scenario.

So, What’s the Million Dollar Question…

What do these “Energy Broker Middlemen” really do in exchange for their commissions and how much are those services worth? To clarify, let’s evaluate the value of a Supplier and a Broker. Suppliers first…

What about Suppliers of Electricity Rates?

In addition to offering advisory and customer service, an energy supplier will…

  • Purchase energy in the wholesale market on your behalf
  • Take on market risk to offer you a fixed rate / kWh
  • Handle wholesale billing, market forecasting, and much more

What about Energy Brokers?

In summary, a good Broker should…

  • Find the best supplier and electricity rates for you
  • Follow the market to help you renew your electric rates at lower prices
  • Handle any customer service issues that arise

If you’re lucky enough to have a good Energy Broker, who answers the phone every time you call, helps you with billing issues, and always finds you lower rates, those services might be worth several hundred dollars per year.

Let’s face it, how many problems per year do you really have with your utility bill? One, maybe two?

If your Broker is putting in 10 hours per year managing your account and delivering value to you, at a rate of $40 / hour, those services should be valued at $400 / year in Broker Fees.

What’s the catch?

The catch? Most Brokers are not performing any of these services and are earning thousands per year in commissions…

In summary, the “typical” Energy Broker is heavily marking up rates and not performing any of the “service after the sale” functions. They lock in high commissions for the length of your contract and bring no value to the transaction.

So, what should you do?

First and foremost, ask your Energy Broker how much commission he has built into your electricity or natural gas rate. In fact, asking is not enough, request that he prove to you via a supplier margin confirmation, so you can really be sure. After this, decide whether the money you are paying to your Broker through your electricity rate is worth the value he/she is delivering to you.

In conclusion, you might find out that you are better off doing it yourself and saving the extra money. You might also be interested in finding out what we do for our customers in exchange for the broker fee that we add to electricity rates. Contact us by clicking here and we would be glad to show you.

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