By: Nishant Jain -- Senior Research Analyst
29 December, 2014
Reverse auctions are catching up as a popular tool for energy procurement. A reverse auction is run over a set time period, with energy providers submitting bids for the contract. Competing bids are visible to all participants during the course of the auction, allowing resubmission of lower proposals, exerting downwards price pressure and hopefully providing the purchaser with the best possible deal. Reverse auctions can play a very important role in most competitive price discovery. However, it needs proper management and utilization alongside expert decision-making on timing of the auction. There are a number of factors that need to be taken into consideration to reap the advantages of reverse auctions. Since energy prices are so volatile, the timing of energy procurement can be more important than determining the supplier. Also, it is to be ensured that all suppliers including the large and prominent ones choose to participate in auction for a competitive bidding process. There is also challenge of managing supplier relationship model because reverse auction mitigates the possibility of long-term relationship with any supplier. This paper analyzes factors for a successful reverse auction and potential pitfalls are identified which can be a roadmap for companies planning to use reverse auctions for their energy procurement process.