The difference between energy brokers and consultants

A question that we get asked frequently is – what is the difference between an energy consultant and a broker? Before insulting any parties, I will first caveat that the discussion below is based upon 25-plus years of experience providing support to commercial and industrial businesses across the globe. I am sure there will be some who will disagree with my views and call them self-serving, but nonetheless, here it is.

As a general rule, energy brokers tend to focus their attention on the smaller end of the market. This aligns with the fact that smaller consumers typically make faster decisions, prefer simple (fixed-price) supply contracts, and prefer not to be billed for the provision of services. Moreover, smaller consumers are satisfied with a reduced level of services, meaning they are looking for a lower price for their energy but not much else. Accordingly, the sales pitch from most brokers is the same – “we can get you a lower price for your energy, and you will not have to pay me.” While the statement is not an out-and-out lie, it is also not wholly truthful. For consumers on a regulated rate or tariff, moving to the open market may reduce their overall cost. For consumers who are already in the open market, whether their next supply contract will reduce their overall cost will depend on several factors, the principal one being the direction of the traded price of energy since the consumer signed its last contract more so than any magic process utilised by the broker. Finally, the fee. While the consumer does not pay anything directly to the broker, the broker adds its fee directly to the consumer’s energy price. This adder is collected by the energy supplier and then paid to the broker. So, consumers pay the broker indirectly through the energy invoice. This lack of transparency has caused an increasing number of countries and states in the United States to enact disclosure regulations, forcing brokers to disclose their commissions to protect consumers. Some brokers try to obfuscate their fees, claiming that their fee is some “marketing fee” reserved for them by the supplier. This is pure nonsense. Energy suppliers will pretty much add any reasonable or sometimes unreasonable fee requested by a broker on their prices.

The basic broker’s pitch is that “we can get you a lower price for your energy, and you will not have to pay me.” While the statement is not an out-and-out lie, it is also not wholly truthful.

Energy consultants typically work with larger commercial and industrial consumers. These consumers tend to be more sophisticated, usually are slower at making decisions, require more sophisticated supply contracts and risk management support, and prefer to be billed directly for services as part of a purchase order (PO) process. Generally, consultants provide a variety of different services, including, but not limited to, invoice processing, online energy information systems, rate analysis, contract procurement, risk management, budgeting, energy efficiency, and sustainability. Consumers using consultants may use some or all of these services. Unlike brokers, whose work is typically transactional, consultants integrate and form part of the client’s energy management team, i.e., work with members of the accounts payable, procurement, engineering, and sustainability departments. Consultants are seen as specialists or expert advisors. Since a consultant is paid on a direct annual fee basis, its advice and support are unbiased and free from conflict.

For example, a broker makes more commissions the longer the term of the supply contract. Take a consumer with an annual consumption of 2,500 MWh per year and a broker who adds $3.00 per MWh (or $0.003/KWh). On a one-year supply contract, the broker makes a fast $7,500. However, on the three-year supply contract, the broker triples its money, generating $22,500 in commissions. Consequently, it is against a broker's financial interest to recommend anything but a long-term supply contract, irrespective of the current price of energy or its forecast direction. On the other hand, consultants make no more or less if a client's supply contract is short or long – if a consultant provides poor advice, it risks the termination of their contract and the associated fees. No one has a crystal ball and can accurately predict the direction of future energy prices, but experience seems to indicate that brokers always seem to think the risk is to the upside and it is “safer” to lock in a longer contract. Coincidence or causation – I leave it to the reader.

While there are always exceptions to almost every rule, the few short paragraphs above lay out a reasonable framework of the difference between an energy broker and a consultant. A rule to which there are no exceptions is that if a consumer opts to use a broker to secure its energy supply contract, it should ask and understand precisely what the broker is adding to their supply contract.

Remember, anyone who claims to work for nothing is lying to you – only a very rare altruistic few in this world do something valuable for nothing.