Energy Volatility Challenges Organizations
Due to persistent energy price volatility across the EMEA market, organizations regularly face challenges that directly impact energy costs and subsequently profit margins. Organizations can mitigate their exposure to these risks using a variety of strategies, including risk management and strategic energy sourcing solutions, which help manage (or even avoid altogether) increasing energy costs.
When organizations are considering an energy risk management strategy, it is important to choose an approach that is suitable for every energy market in which the organization participates and aligns with a plan for both short and long-term business needs. Let’s explore two common and options: fixed and flexible energy procurement strategies
Fixed vs. Flexible Approaches to Risk Management
The straightforward approach to energy risk management is to fix your energy price contract for a set period. For many organizations, this is the only viable option due to their relatively low consumption. An alternative strategy, for those with the required volume (more than 10 GWh), is to use a flexible purchasing approach. Flexible purchasing strategies enable organizations to adapt to any kind of market environment, by taking coverage on a bullish market and selling volumes back should the price trend turn.
Such flexibility is only available to companies with sufficient volume. Managing energy price risk in smaller (less than 10 GWh) organizations has historically been challenging due the lower total energy spend, leaving organizations missing out on many benefits of strategic and dynamic risk management strategies. To allow organizations with smaller energy loads to enjoy the benefits of flexible energy procurement, organizations in some countries are adopting a portfolio approach.
The Portfolio Approach
The portfolio approach is currently available in the United Kingdom, Germany, Holland, Belgium and Spain. At present these are the only markets where an agreement has been made with the selected suppliers to manage the associated complexity. This approach is the perfect choice for smaller consumers of energy who wish to implement a flexible procurement option that previously only large consumers of electricity and gas would have access to.
In a portfolio arrangement, organizations with smaller volumes of energy spend are combined with volumes of other clients below the 10 GWh threshold and are managed together with the supplier. By grouping organizations together, aggregated trading is possible for these completely unrelated companies, and the required volumes can be met to unlock additional value for each. Such benefits include regular market monitoring, the ability to take advantage of market opportunities which reduce the impact of volatility and added protection and flexibility to address high price environments.
The benefits of a portfolio approach are enabled by increased access to flexible and sophisticated purchasing strategies in both downward and upward trending markets. Due to the combined portfolio size and the comprehensive tendering procedure, each participating organization will minimize its individual margin levels, leveraging economies of scale when entering the market. Beyond the cost advantages, all organizations benefit from similar terms and conditions which facilitate the fully flexible management of the bundled volumes, all with minimized volume risk.
On behalf of the buying group in a portfolio, dedicated Schneider Electric experts execute a balanced market-cost focused strategy by fixing (buying) and unfixing (selling) certain proportions of the forecasted consumption to optimize exposure to the market. To deliver the best value in each market where the portfolio approach is viable, suppliers are awarded contract placement after completing a comprehensive tendering procedure, where both quantitative and qualitative factors are taken into consideration.
Which Purchasing Option is Right For You?
There are many energy purchasing options available, from the standard fixed price, indexed price to daily and hourly markets and the most flexible or sophisticated option (portfolio approach), the ability to flexibly procure energy. Consider the following factors for each when deciding which option to use for your organization:
• Fixed priced options can work well if your organization is agile and can quickly launch and execute tenders to secure new contracts and capture market opportunities. However, this is not the case for all organizations, so an option with longer contract terms can help overcome such challenges.
• Standard indexed price is a valid option for organizations that are very market focused and can sustain significant adverse variances to budget, large year on year price deltas and have no or minimal business impact to highly volatile markets.
• Flexible procurement, or a portfolio approach, is the most optimal solution to both manage risk and optimize market opportunity. When the required volume is met, flexible procurement gives organizations the ability to buy and sell in a controlled environment, for upside protection in a rising market but also downside opportunity in a falling market.
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Contributed By: Gabriella Somfai, Risk Manager & Gabor Szabo, Senior Energy Sourcing Analyst