14 Feb Making the Leap from Broker to Retailer: A Risk Manager’s Roadmap
by: Gabriel Phillips | GP Energy Management
There are many reasons a retail electricity or natural gas broker might consider becoming a retail supplier themselves. They may want transparency and control over the margins embedded in their customer’s retail energy contracts. They may want to offer longer-term contracts to customers allowing the firm to build long-term equity in their business or even considering an exit strategy in the foreseeable future. In general, we see brokers reach this cross road because they are looking for ways to provide better value to their customers.
As an energy and risk management company, we have heard the pain points of many brokers as they have become our clients and moved along the path to becoming electric and gas retailers themselves. In this process, every company faces unique challenges, ranging from capitalization to roll-out planning, but it is fair to say that there is a general flow to the process of being a wholesale power and gas market participant that if followed, a broker can avoid feeling like a fish out of water.
Below, we have highlighted the biggest steps on the road map to becoming a retail supplier in a deregulated market in North America. We encourage you to reach out to us directly to get our perspective on particular decision points or road blocks in this process as early as possible.
- Head Room Analysis and a go-to Market Strategy
We always start by asking the obvious question, “Is there opportunity in the markets where your firm has a presence?” Quantifying whether you can offer value to customers in your territory day-one is key. Building this business case allows the broker to build an educated roll-out plan.
- Diversified Licensing
Since head room can come and go, being operational in many markets is the key tool in every retailer’s ability to manage enterprise risk. This phase includes preparation of state and utility licensing applications, utility EDI testing project management, ISO, and pipeline applications. The timeline for these activities is different in each region and so are the financial obligations. Some processes must be done sequentially, others you can parallel-path, all of which need to be handled properly the first time to avoid costly setbacks. Understanding the timeline is essential to managing the burn rate of your capital investment in this new business venture.
- Financial Modeling
Done properly, the credit approval process with potential suppliers and lenders requires highly informed financial modeling. To get a credit wrap or a Preferred Supply Agreement (PSA) you will need a complete set of forward financial projections. A new retail supplier needs to know their effective cost of capital for various supply and credit options as well as a way to ensure they can remain solvent as they execute on their growth plans.
- Sales and Operation Planning
When brokers already have customers where they are becoming retail supplier, they need to effectively execute their plan to cross-sell to avoid value leakage and regulatory risks. More importantly, if they want to attract new customers as well as suppliers and lenders, they must articulate how their offering is differentiated from the competition for reasons other than price.
- Risk Management
In approaching operations, there are other considerations that are as important as the aforementioned such as internal risk policies, billing system selection, credit policies and wholesale energy operations. These steps can be addressed early on the path, but should be done so with an eye on each businesses specific strategy as every path to market will have different opportunities and pitfalls to navigate.
To find out how GP Energy Management can help you, please contact us at email@example.com so we can discuss your needs and provide you with a solution that fits your goals and bottom line.