Trading energy
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:
- The number of factors co-influencing each other is very large.
- Some key figures on supply and demand are simply missing.
- Unexpected events occur.
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.
Energy risk management to survive volatile energy markets
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, Miracom Energy 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.
Take control over the markets with energy price management
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, 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.
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Change is the end result of all true learning. We invest in building understanding, awareness and support for the energy transition amongst relevant audiences in our society.Miracom energy\ Education develops educational modules and organizes masterclasses for companies, in energy, maritime transportation, constructions, design, and (non) governmental organizations.
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