Whether you like it or not, the trade of energy is an integral part of your energy procurement efforts: Will you keep your prices open for spot market indexation or fix them forward? If you fix forward, will you do it in one shot or in different moments? When do you choose those moments? Will you also unfix prices when markets turn around? These are some of the most important questions for the energy entrepreneur.
In deregulated energy markets, it’s no longer the government that sets the price level but rather the laws of supply and demand. Wholesale markets develop through exchanges or Over-The-Counter marketplaces (OTC). Energy suppliers and producers trade on a spot and forward basis, agreeing on prices for the next days, next months, next quarters, next years, etc.
Suppliers make sure that their retail offers to consumers are in sync with the prices that they pay in the wholesale market. What’s the first thing that suppliers look at when you ask them for a fix price quote, e.g. for next year? The price at which they can buy the energy for next year in the wholesale market. Due to this, the rising and falling prices in the wholesale markets that you’re attached to are an important driver of energy price differences.
Supply and demand of energy is determined by many, many factors. This makes pricing volatile. We’ve seen many examples in the last years of energy wholesale prices doubling or halving in less than a year. Moreover, attempts at predicting the energy price have proven again and again to be fruitless. This is because:
This volatility and unpredictability means that you can never be sure whether your decision to fix, not fix or unfix an energy price is taken at the best possible moment. Therefore, energy market volatility is a threat to the bottom line of your company. A clever energy entrepreneur will eliminate this risk and exploit the opportunities that lie hidden in the curves of energy pricing.
Because energy markets are unpredictable, energy risk management is a necessary component of your energy procurement toolbox. Chaos theory is a better guide for buying energy than forecasting attempts. Expect the unexpected to happen. If you fix your price, markets could fall and you could lose competitiveness. If you don’t fix, the markets could rise causing your energy costs to derail. From this perspective, the unpredictable movements of wholesale energy markets are putting your company’s profitability at risk. If you try to fix everything at the best moment, you are maximizing that risk.
“Because of their thorough market follow-up and risk management, E&C helped us distinguish fundamentals that really impacted the market and prevented us from panicking over smaller upswings in the market as we sometimes did before.”
- A company in the transportation industry -
While we cannot use forecasting to limit your exposure to energy price volatility, we can take measures that effectively eliminate the risk to your financial bottom line. As a first step, you need to understand how your company is affected by unexpected changes in energy pricing. What has the greatest impact: rising or falling prices? Once you decipher this, you can take the right decisions regarding fixing, not-fixing and unfixing.
There is no strategy that guarantees that you will always have the best price. That said, a well-defined and well carried-out energy risk management policy can effectively protect your company against the whims of energy markets. A comprehensive strategy will set the framework for your energy price management decisions.
Could your company use a tailor-made energy procurement strategy?
With energy price management, you decide when prices are fixed, not fixed or unfixed. Energy markets are unpredictable. Therefore some energy consumers decide not to make any fixations at all. Their price is pegged to an average spot or forward wholesale value. Nevertheless, taking deliberate price fixing decisions can create value. If your main strategic goal is to establish long term energy cost stability, active price management with fixation of prices for several years into the future will lead to better results than just taking average prices.
No one can claim that they “always beat the market (average)”. But applying a few simple principles, such as not fixing too much in one moment and not fixing in a falling market, can lead to good results. Of course, hindsight is always 20/20 when it comes to price fixing decision. But active monitoring of energy markets can help you in fix at opportune moment rather during market peaks.
Energy price management starts with analyzing the markets. Market analysis cannot tell you what the price will do in the future. But it helps you to understand what the price is doing now and allows you to identify the opportunity moments. Good market analysis will be unbiased and global by nature. It will distinguish the real drivers of supply and demand from the less important variables.
Take the first step to managing your energy prices:
As an energy entrepreneur, you will strike the right balance between eliminating the risks and exploiting the opportunities of energy market volatility. As an entrepreneurial consultant, E&C is an excellent partner for achieving this balance. E&C’s risk management advice is aimed at protecting your company, not us as a consultant. We never use standardized surveys or “one size fits all” approaches”. With E&C, your energy risk management will consist of an in-depth, entrepreneurial analysis of your business and how it is affected by energy price volatility. Based on that analysis, you can fashion your own policy for fixing, not-fixing and unfixing energy prices:
Being an energy entrepreneur is about much more than just devising elegant strategies. Having the discipline to implement them is just as important. E&C will ask more of you than just an email in which you confirm that you are onboard with our strategy. We will strongly advise you to monitor its implementation and not take too much risk with your company’s financial bottom line.
Our team of empowered and dedicated consultants will guide you with energy trading advice. We will call you the morning that a fixing or unfixing decision needs to be made. Our market analysis will paint the big picture, shedding light on the main drivers of supply and demand without overloading you with technical details. We’ll help you with the practicalities of fixing or unfixing so that you can focus on decision-making: checking price quotes and moving forward with your price fixing decisions.
If you want to learn more about our common sense, entrepreneurial approach to trading energy:
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by author Merlijn Mertens
The Polish government froze prices back in December.
by author Ondrej Zicha
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E&C is an energy procurement consultancy with an international team of energy experts that offer a unique blend of global capabilities and local expertise.
Our offices in Europe, the US and Australia serve more than 300 clients from South-Africa to Norway and Peru to Australia that have an annual spend between 1.5 million and 1.5 billion dollars.
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