New threats, rivals stampede into online energy

Roxane Richter, Energy Marketing Editor

No longer is it the traditional energy industry competitor who will use technology to gun for your piece of the e-commerce pie. The new threat on the e-energy horizon comes from dot.com companies who are fast-footing their way into every market niche and cranny. Not totally inconceivable, companies like Amazon.com may indeed one day offer energy products and services. And woe to the companies who refuse to put the “e” in their energy services-they’re facing strong competition from new middlemen, virtual portals, who bring together buyers and sellers.

The list of e-market players (online aggregators, digital auctions, exchanges, etc.) in energy is long-and getting longer by the day. A few of the more interesting current e-market players include: eSpeed (B2B e-commerce commodity-specific spot and futures market); HoustonStreet.com, Bloomberg PowerMatch and Altra Energy Technologies (wholesale “many-to-many” commodity trading platforms); Red Meteor.com; PEPEX; Intercontinental Exchange (online OTC trading of commodities); Energycentric.com (e-links utilities and suppliers for equipment and services); Enermetrix.com and Excelergy (retail “many-to-many” market); Utility.com (retail “one-to-many”); Enron Online (wholesale “one-to-many”); Essential.com (online store for power); Tradeout.com (business surplus market) and eProcureNet.

Defining e-market models

In “The Surge of Online Energy,” Forrester Research defines and describes the e-market players:

  • Exchanges: A market for commodity-like products. Fulfills last-minute buy and sell needs for industry players with pre-existing relationships. Predicted sales by 2004-79 percent natural gas; 40 percent power.
  • Bid systems: A mechanism for lowering the acquisition price for products. Enables a wide range of suppliers to bid competitively in real time. Predicted sales by 200-12 percent natural gas; 24 percent power.
  • Aggregators: A one-stop shopping venue. Streamlines purchasing by concentrating many product catalogs for buyer groups. Predicted sales by 2004-3 percent natural gas; 20 percent power.
  • Auctions: A mechanism for liquidating surplus at best possible prices. Enables a wide range of buyers to bid competitively for products at below-market prices. Predicted sales by 2004-1 percent natural gas; 1 percent power.
  • Extranets: A secure, invitation-only site over the public Web where end users buy directly from sellers. Predicted sales by 2004-5 percent natural gas; 15 percent power.

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Forrester Research projects that more than 70 percent of the online trade of utilities will take place in e-markets, representing a market potential of several hundred billion dollars worldwide. By the year 2004, Forrester predicts that online natural gas sales will hit $160 billion (about 25 percent), and online power should exceed $100 billion (or 11 percent). Plus, according to a Business Week report, e-markets are expected to reduce transaction costs by two-thirds.

Shifting the balance of power

“What’s happening is the balance of power is switching from early start-ups to the big buyers and sellers of electricity,” explained Jim Walker, senior analyst at Forrester Research. “That suggests that there will only be a few to remain. For instance, Altra and Enermetrix.com have systems built. The question will be if the big players buy or build. A company like AEP-what they have is money and liquidity, but what they don’t have is the system. So they’ll need to get the technology.”

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But with so many incoming e-market players, how many can the market feasibly sustain and how will they survive? “In this world of mergers and acquisitions, the strongest players may become acquired by these big players and large consortiums,” Walker noted. Rather than being forced out of business, he said, they’ll seek out alliances and mergers.

Going business-to-business

We’ve all read and re-read reports of how Business-to-Business (B2B) will reach so-and-so many giga-jillions by year 2000-something. As the latest number, AMR Research, Inc., a market analysis firm specializing in e-business strategy and infrastructure, indicates that B2B e-commerce will be adopted at a more accelerated rate than many companies realize, reaching $5.7 trillion by 2004. The firm estimates that industry leaders will move 60 to 100 percent of their transactions to the Internet over the next two years. Furthermore, the AMR states that companies that do not take an aggressive approach to B2B e-commerce and prepare for digital marketplaces, will lose customers and ultimately fail. The firm concludes the following drivers are leading the B2B e-commerce momentum:

  • Trading exchanges: These marketplaces expedite B2B commerce adoption, allowing smaller companies to solicit customers, respond to bids, and take orders via the Internet with minimal investment in technology investments.
  • Cost savings: Effective Internet commerce business practices offer tremendous cost savings; cost reductions could exceed $50Billion in 2004.
  • EDI commerce volume: Expectations are that much of the current Electronic Data Interchange (EDI) volume will gradually move to the Internet as advanced supply chain services and collaborative capabilities become a necessity. EDI standards represent a valuable semantic starting point for exchanging documents within the business community.
  • Advanced supply chain management (SCM) concepts: Companies need to improve their internal SCM practices and realize that e-commerce is the next step in the evolution of advanced SCM concepts not its replacement.

Online auctions & digital trading exchanges

By anyone’s estimate, there has been a truckload-about 30-of new dot.coms entering the trading arena in energy, not including newcomers like the online fixed/financial transmission rights (FTR) auctions, and old-timers like NYMEX and the Chicago Mercantile Exchange.

AMR Research recently identified and evaluated the top 20 Independent Trading Exchanges (ITEs). “The ITE market is still very young and the future of a successful ITE will ultimately depend on its ability to address participants, technology and business concerns,” said, Bruce Richardson, senior vice president. “None of the top 20 ITEs are a ‘sure thing’.” The ITE company ranking indicates that not all ITEs are equal, and that there are four evolving levels of functionality: information, facilitation, transaction, and integration:

  • Information: The bulk of the B2B start-ups are in this category. The infor- mation takes the form of industry directories, product databases and catalogs, discussion forums and billboards, and professional development.
  • Facilitation: Facilitation is the ability to match a buyer’s specific need with a supplier’s specific offering. Transaction is completed offline via traditional channels.
  • Transaction: This is a higher level of commitment from the ITE and participants where trading partners can consummate the transaction online.
  • Integration: Integration functionality allows ITEs to fit into a larger supply chain and application integration strategy.

The top-five rated ITEs included Altra Energy Technologies Inc., Ventro Corp. (formerly Chemdex), CheMatch.com Inc., SciQuest.com Inc. and PlasticsNet.com. The best-positioned ITEs are in the integration category, where they are successfully leveraging existing relationships and are integrated with legacy Enterprise Resource Planning and SCM systems.

“I believe that between Bloomberg and Altra, we’re doing 90 percent of all electronic power. We’re doing a higher transaction count and they’re doing a higher volume count,” said Altra’s chairman Rusty Braziel. “Many of the digital exchanges that have been announced are focused on the buyer and seller. In our natural gas business, we track counterparty credit and schedule delivery from seller to buyer. It’s those value-added services that add to the overall value. It’s those same sorts of services that will grow in importance as well.”

A dramatic drop in numbers

AMR predicts that within the next year, the number of ITEs will drop to two to three exchanges within each industry as a result of bankruptcy, mergers and acquisitions. Major issues affecting ITEs include:

  • Revenue Strategy: AMR Research’s analysis shows that the current revenue model of deriving fees based on a percentage of the transaction is flawed. The firm expects most ITEs to adopt a tiered subscription model and to focus on developing multiple revenue sources. Ultimately, ITEs will begin to look like Application Service Providers (ASPs).
  • Integration: To be successful, the majority of ITEs will need to partner with enterprise application vendors and systems integrators to address back office integration issues.
  • Liquidity: Several ITEs are finding it difficult to drive transactions and many have not processed their first orders. As a result, many competing ITEs are beginning to consolidate and looking to span multiple verticals to increase revenue.
  • Neutrality: The pressure to build liquidity and increase transaction volume is forcing ITEs to accept equity investments from established brick-and- mortar companies, thus sacrificing their neutrality.
  • Suppliers: Suppliers, concerned with pricing pressures and fear of commodization, are launching their own exchanges on their own terms, forcing ITEs to dramatically change their business models to accommodate their suppliers who do not want disintermediation.
  • Technology: ITEs provide value through technology, but they do not provide the more important part of the equation: Supply
  • Chain Execution: During the next year, ITEs and wholesale distributors will increasingly take equity stakes in each other to fill their functionality gaps.

The firm also predicts that the current number of 600 ITEs today will drop to 50 to 100 by the year 2001.

Putting the “e” in procurement nets

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Touted as the “next wave of cost reduction,” e-procurement relegates maverick buying practices, redundant processes and non-strategic sourcing to the non-e netherworld. (By the way, procurement-the purchasing, transportation, warehousing and inbound receiving of materials-indeed differs from pure purchasing-the actual buying of materials. Whereas there may be electronic purchasing of materials, procurement is a closed loop process that begins with requisition and ends with payment.)

According to e-commerce researchers Dr. Ravi Kalakota and Marcia Robinson (authors of “e-Business: Roadmap for Success”), large companies spend more than 5 to 10 percent of revenue on office equipment (supplies, software, etc.), representing a B2B market of exceeding $500 billion a year. Chief procurement officers, according to Kalakota and Robinson, are looking to solve the five biggest challenges faced by corporate procurement today:

  • Reducing order processing costs and time cycles;
  • Providing enterprise-wide access to corporate procurement capabilities;
  • Empowering desktop requisitioning through self-service;
  • Achieving integration with key back-office systems; and
  • Elevating procurement to a position of strategic importance within the organization.

Already, industry professionals are extending their e-reach into international markets. EPXNet.com, a developer of Internet-based energy markets, recently announced its launch of the first Web-enabled energy procurement platform in Europe. “Just about every organized platform has designs on using the Net,” said Riaz Siddiqi, president of EPXNet. “We’re focusing on power first, as the European power markets are deregulating in advance of natural gas. For instance, in Germany, they’re trying to accomplish in two years what the U.S. couldn’t accomplish in 20.” Siddiqi noted that e-platform survival today is based on two primary factors: how many disparate markets evolve regionally, and grabbing early attention of users and customizing the platform to users’ needs.

Do “e” or die

Clearly, any company-energy or otherwise-that is without an aggressive B2B e-commerce strategy runs a sky-high probability of failure in the coming dot.com world. But merely participating in digital/virtual marketplaces is not enough; companies must also implement technology and business processes to reap the illimitable benefits of B2B commerce.

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