Risk Strategies: The Real-Time Future

Commodity markets in many deregulated states and countries have prices settle in increments as short as five-minute intervals. However, in most of these regions, the demand side participates in these near-term markets far less than they potentially could. With real-time load monitoring technology and equipment that can adjust load in relatively short order, many consumers have the infrastructure to monitor and make decisions in similarly narrow intervals.

Yet most organizations that participate in risk management programs don’t currently hedge any nearer term than the following calendar-year. The risk strategy in this case is limited to optimal timing of that calendar-strip contract. With the ability to think on and react to monthly, weekly, daily or even intra-day markets, the energy market opportunity is substantially larger than what consumers are currently taking advantage of.

Being able to think and act in nearer intervals allows an energy consumer to incorporate different time frames into their risk strategies. For example, the advantage of participating in hourly or day-ahead markets is that prices are regularly lower than the average forward contract. This is largely due to the forward incorporating a certain risk premium for future uncertainty. The flipside being the upside risk is eventually realized not in the forward, but near-term markets.

With the risk comes the reward, and this valuable tradeoff warrants a newer and broader risk management strategy.

In Europe, markets have historically been more flexible than in the U.S. In particular, organizations are able to use their projected load as an asset, leveraging their hedged position to unfix and take advantage of shifting market momentum. Clients regularly think monthly and make their final decision about how much exposure to leave to the spot market. However, there is a push for even more near-term thinking and strategy.

“What if we can act on the week-ahead contracts and day-ahead contracts… maybe even hour-ahead contracts?”

These questions are most important to organizations that have generation assets of their own. But even for organizations without onsite generation, their load itself is a market asset. There is a stronger momentum for the demand side of the equation to operate on the market just like the supply side — responding in real time to price signals.

This is where a new mode of operation comes into the equation. For every new time horizon a consumer considers, the risks and rewards are different. This requires a unique set of tactics for each timeframe and requires businesses to incorporate these tactics into the broader strategy.

While developed energy markets provide the opportunity to participate in myriad ways, less developed markets such as India only have real-time prices to contend with. New monitoring and load-managing technology allows for approaches in these burgeoning markets that did not exist five years ago. For organizations to be able to actively participate, they need a risk management strategy alongside real-time data and the ability to adjust load quickly throughout the day.

Indian prosumers in particular have the ability to adjust production of their onsite generation. Previously, backup generation was on hand in periods of blackouts, but with the right combination of technologies, these distributed resources can create supply- and demand-management opportunuties, and create additional value for the businesses.

While electricity markets will continue to be volatile, strategic involvement in near-term markets is gaining traction and paying dividends. Organizations want to simultaneously take advantage of low near-term prices and to minimize the impact of the rare-but-expensive upside. This is where a holistic risk management program comes into play.

Learn more about the evolution of energy markets by accessing our free Procurement Toolbox.