Today’s sales topics are going to cover the commissions that retailer energy providers, rooftop solar installers, and community solar firms are willing to pay to acquire residential and commercial customers:

I co-wrote this post with Jonathan Crowder. And before getting to the numbers, w need to define a few key terms:

Originators: In the energy space the main forms of customer acquisition remain offline brokers. These brokers operate through door-to-door sales, outbound phone sales, and other traditional sales techniques. Online origination through state sites, comparison sites, energy websites and connected home /clean energy brands are the fastest growing form of customer acquisition

Upfront: the amount that an energy firm is willing to pay upon confirmation of a customer’s enrollment. The energy firm usually pays this spiff upon receiving the customer’s payment information – or upon the the payment of the first month’s energy bill.

Residual: the % of the supply portion of the energy bill that an energy firm is willing to pay the originator for as long as the customer stays with the energy firm. This payment option is more specific to retail energy and is meant to incentivize the originator to not keep flipping the customer to another provider every time the customer contract comes up for renewal. These payments are done monthly, in arrears, and are usually tied to the size of the customer’s energy bill.

A “mil”: In the energy compensation narrative, a mil refers to Is 1/1,000th of a US dollar, or 1/10th of a cent. This is important to know because the “mils” are how energy providers create business alignment with originators. The mil is used to calculate how much an originator earns in monthly commissions. For example, if a small business uses 10,0000 kWh of energy per month, and the originator agreed to a “5 mils” contract, then the originator gets paid a monthly amount of (10,000 kWh * $0.005 dollars per kWh)= $50 per month of commission.

Contract Term: Like a cable bill or your phone plan, many energy contracts can range from prepaid monthly plans to 3, 6, 12 or 24+ month contracts. Some community solar contracts are 5 years, or more! And a rooftop solar contract is ultimately tied to the house (vs the homeowner) and can be 20+ years long. Like with other home services products, terminating a contract early likely results in a pre-payment penalty.

Renewal: At the end of a contract, customer’s can either roll over into a new plan with their existing energy supplier or search for a new firm.

Rate: The amount, usually charged per kWh (just like your utility bill), that you pay for energy. It is important to note that there are different prices, depending on the portion of the energy bill you are covering. Some firms (retail energy providers, community solar) may just be substituting out the supply portion of your energy bill. Other offerings, like rooftop solar, may include both supply and broader distribution charges as part of their rate.

SALES CONTRACTS

Since we are talking about a commodity here any additional margin paid to a broker is very simply added to the underlying rate. If a retailer is pricing energy at 10 cents and you want to make a penny of margin as an originator, they will simply allow you to Mark the rate as 11 cents in your reseller agreement. The problem with this structure is that the least informed customers can pay very non-standard rates if they are sold hard by a broker. I have heard horror stories where offline brokers charges a 50% premium to the underlying commodity.

Thankfully, digitall experiences are bringing better experiences. And there is greater consistency to what online brokers are able to charge, and therefore able to pass along to the consumer. Here they are:

Residential consumer, Texas: $125 upfront 2-3 mils. The average texas home consumes around 15,000 kWh so the retailer is willing to pay up to $175 for the first year of contract and about $50-75 per year thereafter.

Residential consumer, non-Texas: $75 upfront and 2-3 mils. The average US home outside of Texas consumes about 10,000 kWh so these accounts are smaller and usually less profitable. This results in about a $100 first year payment and $30-40 annual value thereafter.

One of the most ludicrous part of this energy experience is the equivalent “rake”. At best, a customer can expect to save around $50-75 a year by choosing a retail supplier that isn’t their own utility. And the retailers pay nearly double that to acquire a customer. The cost to educate and acquire a customer is at least 2x the savings – so the system is mostly broken.

Commercial consumer: standards are variable but usually ranges from 3 to 10 mils depending on the size of the account. At Choose we had a lot of small accounts (restaurants) who were around 30,000 kWh per year so they would pay us about $150 per year at 5 mils. Once we had a huge warehouse in the Port of NJ sign up through our site at 10 million kWh+ annually and we made tens of thousands of dollars each year on one meter. This range shows how variable the commercial market can be in the supply arena. It is these big accounts where offline brokers focus and try to add large broker fees to make mega-commissions and a lot of the “fat” still lives in the system.

Bill Gurley famously covered the different “rakes” of online platforms. Online sites commissions range from ~3-30%. In retail energy, if the average rate is 10 cents supply, then the originators are taking about a 5% take- pretty low. However, if you take into account that this is a commodity with lower margins, at these commissions the originators capture as much as 50% of the profit. And that is the real apples-apples comparison here.

Next week we will cover “green retail plans”, community solar and rooftop solar origination figures. I will also cover how retail suppliers coordinate to monetize on the broader connected home opportunity.

Matt Ridley is the author of a number of award-winning books. Notable hits include The Evolution of Everything and How Ideas Emerge. My personal favorite of his is The Rational Optimist. One of the many reasons I enjoy Matt’s writing is his ability to deconstruct complex outcomes to their foundational drivers.

I am working on a longer-form paper that details some of the emergent behaviors of technology in the energy and industrial transition. In the research process I have engaged a number of complexity and platform leaders. One of those leaders, the esteemed VC Bill Gurley of Benchmark, pointed me to Matt Ridley’s latest book, How Innovation Works and referenced that there is actually a section on energy innovation. Well, one week later and I have covered the book and am happy to give it a ringing endorsement. Whether you are new to energy or an experienced pro, you will learn something new. And, classic to Matt Ridley, he frames energy innovation in a refreshing way.

My Favorite Themes, Quotes & Takeaway from the Energy Section

Theme 1: Failure is the father of Innovation

Innovation is itself a product, the manufacturing of which is a team effort requiring trial and error.

Edison called his work “the invention business”. “He remained relentlessly focused on finding out what the world needed and then inventing ways of meeting the needs…his method of invention was always trial and error. In developing the nickel-iron battery his employees undertook 50,000 experiments. (!!)

“Inventing is 1% inspiration and 99% perspiration”

Theme 2: Innovation is Inevitable

I am fascinated by how technology inventions seem to converge at a specific point in time. And particularly how this convergence occurs after extreme technology advancement and trial/error reminds me a lot of Michael Waldrip’s Complexity. The technologies that enable a transformation are all advancing independently AND interacting with each other. Add in a number of entrepreneurs, acting as catalysts, and suddenly new structures emerge at the “edge of chaos” that result in a new, higher order of efficiency. This arrival to a ‘higher order’ occurred with the lightbulb, and looks a lot like what is happening today with the interacting forces driving a digitized and decentralized energy network.

“Simultaneous invention marks the progress of technology as if there is something ripe about the moment. It does not necessarily imply plagiarism. In this (steam engine) case, the combination of better metalworking, more interest in mining and a scientific fascination with vacuums has come together.. to make a steam engine almost inevitable.”

“The lightbulb emerged inexorably from the combined technologies of the day. It was bound to appear when it did, given the progress of other technologies.”

Theme 3: Innovation Turns Ideas into Practical, Reliable and Affordable Reality

There is a difference between invention and innovation. According to the book, innovation is how famous names like Thomas Edison rise to the top of the 21 inventors who lay claim to inventing the lightbulb. Edison was focused on innovating and specifically on reliability as he tested over 6,000 different filaments for duration and cost.

The ability to take a technology invention and gradually (through testing) get to a customer-available product is where innovators stand out.

Theme 4: Innovation in Energy is Evolution, not a Series of Revolutions

“Long after the key technologies had been invented, innovation continues.”

The first turbine was 2% efficient and today a combined cycle gas turbine is 60% efficient. This 100+ year journey was a collaborative effort with no 1-time transformations. Innovation came from small steps of experts, testing along the way.

The book then also explains why certain atomized production processes improve. And then goes into great detail on how other large scale projects, hampered by the rising costs for regulation, begin to dis-innovate. This is my favorite line:

“Nuclear is ill-suited to the most critical innovation practices: learning by doing. ” The best products leverage subject matter experts to tweak and innovate along the way. The experts find a way to test, iterate and improve. This testing happened successfully with shale gas exploration and fracking: west Texas wildcatters who had small companies were able to buy mineral rights from land owners and were more nimble to do small tests. In other, more regulated oil & gas countries, this innovation could not persist as the state/country owned the land rights.

What this Means TODAY

The installed bases of new energy technologies is gaining critical mass: wind, solar, batteries, EV charger. Wind and solar have gained efficiencies over the years: wind OEMs have made increasingly aerodynamic and larger blades alongside improved gearboxes and materials costs; solar is improving absorption rates and further accelerating efficiency through better inverters, trackers and 2-sided panels. In addition to the hardware, operators are getting better at O&M as they leverage remote communications network, drones, and predictive analytics. All of these continued innovations are consistent with the slow & steady march towards record-setting productions levels.

This installed renewable base coupled with advances in data products, connected devices, and software management, are apt to create a new wave of simultaneous digital advancements. These software solutions will not only accelerate the efficiency of these verticals but improve interoperability with the operating environment. As a result, we are likely to see innovative customer behaviors as these energy consumers adapt to the new product suite available. While fantastical now, these prospective new products and behaviors will seem like inevitable advances in the near-future. How fortunate are we to have the march of innovation?

Summary

In How Innovation Works, Matt covers other verticals Public Health, Transport, Food and Communications. Then he pivots to more horizontal themes such as the economics of innovation, and identifying fads and frauds. He ultimately wraps up with how to get around (the expected) resistance to innovation and which cases are worth fighting. Again, go buy the book – the perspective is clarifying and refreshing.