By Elizabeth Souder
Wal-Mart’s energy strategy goes far beyond selling squiggly lightbulbs. The world’s largest retailer could one day sell the electricity, too.
The company recently made big announcements about its environmental goals to sell 100 million compact fluorescent lightbulbs (the corkscrew ones) this year, shift to renewable energy, and install solar panels and windmills at some stores.
More quietly, Wal-Mart has created its own electricity company in Texas, called Texas Retail Energy, to supply its stores with cheap power bought at wholesale prices. This saves the world’s largest retailer about $15 million annually and gives the company total control over its utility bills.
Plus Wal-Mart now has the infrastructure to sell electricity to Texas consumers. That could change the game in a deregulated state where high prices have become a hot political issue.
And it could help the giant company to continue to grow, even in one of its most saturated markets.
“We’ve considered it. Whether or not it will ever materialize, we don’t know. It boils down to whether the customers and suppliers want that,” said Chris Hendrix, general manager of Texas Retail Energy. “Short-term, it’s out of our scope. Longer-term, anything’s possible.”
Retailers are becoming more sophisticated about buying electricity as deregulation allows power companies to compete for their business.
It’s no longer enough for store managers to simply write a check for the utility bill. Now most retailers make electricity decisions at the executive level.
“Because of deregulation, people have changed the way that they look at purchasing this commodity. Before, they would get a bill, they would send it to accounts payable, and that’s it. Now there’s a lot more that goes into it,” said David Wiers, president of the Texas Electricity Professionals Association, a new group of brokers, consultants and other third parties in the power industry.
A company such as 7-Eleven or McDonald’s might strike a deal with an electricity retailer to supply all Texas stores at a certain price. Others, including Lowe’s, rely on brokers to buy wholesale power for the stores.
Many retailers have installed software to control store lights and temperature from a central location and collect minutely detailed information about their systems, such as the exact temperature inside each freezer.
Such technology gives big-box retailers the ability to get even better deals on electricity by agreeing to cut back electricity use anytime the grid gets overloaded.
But no other retailer has managed to do what Wal-Mart has accomplished in Texas: cut out the middleman. Wal-Mart buys power directly on the wholesale markets.
“Wal-Mart has made a pervasive commitment to minimizing costs. That’s what they do,” said Edward Fox, associate professor of marketing at Southern Methodist University.
In other parts of the country, Wal-Mart, the largest private purchaser of electricity in the U.S., buys electricity from third parties, just like any other retailer. But in Texas, the company saw an opportunity to try something new.
It helped found an electricity provider called Creed Power Co. and, in 2004, acquired the remaining stake in the company and changed its name to Texas Retail Energy. Wal-Mart wouldn’t disclose the purchase price.
According to filings with the Public Utility Commission, the company exists to serve Wal-Mart and Sam’s Club stores. Wal-Mart would have to file an amendment application to allow the company to serve other customers.
Wal-Mart’s stores in Texas use 1.6 million megawatt-hours of electricity each year. That accounts for 0.5 percent of the Texas power grid last year. It’s enough juice to power 133,000 homes. And it’s about one-third of the annual output of one of the new coal-fired power plants TXU Corp. has proposed.
“We think we can do it cheaper than having somebody do it for us. And secondly, it put us in control of our own destiny,” said Mr. Hendrix, of Texas Retail Energy. He said his group of six employees saves Wal-Mart about $15 million a year, net of the cost to run the program.
Mr. Wiers of the electricity professionals association estimates it would cost a couple of million dollars for a retailer to create an in-house electricity supplier.
Power plant next?
Mr. Hendrix said he would consider selling electricity to consumers or to Wal-Mart’s suppliers, if that’s what customers want. But his main focus is buying power for Wal-Mart itself.
He said he would consider buying a renewable-energy power plant, such as a wind farm, if the company can’t find enough vendors to meet Wal-Mart’s eventual goal of using only renewable power.
Mr. Hendrix and Angie Beehler, who handles energy regulation and legislation issues for the discounter, are active in Austin. They testify before the Public Utility Commission and take part in workshops. Mr. Hendrix has been a member of a technology advisory committee at the Electric Reliability Council of Texas, which operates the grid.
Wal-Mart has been stumping for deregulation of electricity markets around the country.
“Anytime you get competition in an energy market, you’re going to have choice,” Ms. Beehler said. “Don’t you like a large selection of green beans? Like Del Monte, Heinz? It’s about choice.”
Selling electricity could represent a fresh growth opportunity for Wal-Mart.
Mr. Fox of SMU said Texas is the largest market for Wal-Mart, and therefore a saturated market.
“Given their scale and their size, they are at upper limits for what they can do in a particular market,” Mr. Fox said.
Still, he added: “There’s a lot of pressure to continue to grow.”
Mr. Fox said electricity sales could fit with Wal-Mart’s push to sell energy-efficient products and its goal to use renewable energy. He pointed to the experimental store in McKinney, where Wal-Mart installed a range of efficient technology and relies on a windmill near the parking lot for some power.
“What Wal-Mart tends to do is they experiment. They make mistakes cheaply by kind of dipping their toe in the water, and then they determine if it’s something they can grow and can be a material part of their business,” he said.
Mr. Fox said it’s unclear whether selling electricity to consumers plays to Wal-Mart’s strengths.
“I’m not sure whether it takes advantage of what they do well in terms of distribution and whether they can exploit their relationships with their customers to do well in this market,” he said.
For electricity industry insiders, those customer relationships are what make Wal-Mart so intriguing as a possible electricity retailer.
“One of the things that would help our markets would be to have one of the companies in it to decide, ‘I’m going to spend the kind of dollars necessary to achieve customer base,’ ” Public Utility Commissioner Barry Smitherman said.
“You would think a company situated like Wal-Mart that has so many customers coming through their doors every day might be able to acquire customers relatively cheaply or without spending additional dollars,” he said.
Texas Retail Energy
Formerly known as: Creed Power Co.
Ownership: Acquired by Wal-Mart, the biggest private electricity user in the nation, in 2004
Business: Supplies power to Wal-Mart and Sam’s Club stores in Texas
Annual electricity supplied: About 1.6 million megawatt-hours
Possibilities: Could buy a renewable-power plant or market to consumers
SOURCES: Texas Retail Energy; Public Utility Commission