Online Energy Industry Powered by Exchanges

Electronic marketplaces will propel online energy sales to $266 billion by bringing about higher levels of efficiency in wholesale markets, according to a study by Forrester Research.

Forrester’s report “The Surge of Online Energy” found that the ability of energy buyers and sellers to find each other on the Internet is radically changing long-established patterns of energy trade. In this new environment, Forrester predicts price competition will supplant trade based on phone calls and personal relationships, pitting providers against each other in online bidding wars. To gain market share, providers will be forced to expand their geographic trading arenas, introduce new product-service bundles, and employ innovative marketing and branding strategies.

“The energy market is ripe for the Internet,” said Varda Lief, senior analyst in Business eCommerce Research at Forrester. “As price-volatile commodities, the natural gas and electricity markets will benefit greatly from the new analytical tools that help buyers and sellers analyze purchasing behavior and market trends in real time. With deregulation loosening up these markets, the Internet will quickly break down today’s inefficient practices.”

According to Forrester, new marketplace models will dominate online trade, including exchanges, aggregators, auction, and bid systems. The majority of online energy trade will be executed via exchanges, Forrester found, because they fulfill buy-and-sell needs for online industry players. Sales passing through exchanges will surge to $171 billion in 2004 by providing wholesalers — the largest sector in the energy market — with real-time market information and quick fulfillment.

Bid systems will win big in the commercial and industrial sectors, as large companies increasingly use the Internet to automate their request for proposal (RFP) and and request for quote (RFQ) processes. By 2004, Forrester expects bid systems to capture 16.5 percent of online business trade.

Although there is little e-commerce activity in retail energy markets today, the deregulation of electricity will pave the way for aggregators to streamline purchases by concentrating many energy catalogs for buyer groups. Forrester expects aggregators to account for $25 billion in 2004, or 11 percent of total retail business trade.

“In the next three years, Forrester expects expanding eMarketplaces to encourage the emergence of new energy players, including firms analyzing the energy market and real-time pricing models, marketers specializing in utility product branding to attract and retain customers, as well as specialists centralizing energy buying for multinational companies,” Lief said.

Forrester’s report is based on interviews with 50 firms that already buy or sell natural gas over the Internet, in addition to technology vendors, energy intermediaries, energy experts, and regulators. Two-thirds of the companies interviewed indicated that they were lured online by the availability of real-time market-pricing information.