FEAT RE FEA ATURE
How to avoid losses in the energy purchasing 'lottery' by managing risk
How to avoid l sses i the energy purchasi g ' ottery' by managing r sk
link wholesale prices to a benchmark or index ofmarket levels, but then include a riskmanagement strategy to guard against sharp pricemoves.
Some larger energy usersmay also have their own on-site generation, trading surplus energy on the grid to limit exposure to higher prices.
4. GE GET TO GRIPSW GRIPS WIITH LIMIIMITS
A riskmanagement plan, in which the trader is only allowed tomake purchases within a set range, can limit any potential market losses, but can constrain gains should themarket drop. Further levels of complexity could be added with automatic triggers and trades, should certain price movements take place and close out against indices near to delivery.
To avoid losses and maximise gains when playing the 'lottery' of flexible and volume energy purchasing, businesses must carefully manage risk, says Magnus Walker, Director of Trading and Risk for Inprova Energy
To avoid l sses andmaxi flexi
and vol energy
se gai swhen playi g the ' ottery' of gy purchasing, businessesm st careful
prepare a riskm nagement plan and trading strategy management strategy–rather than simply approach should be developed at board level.
gy 1. DON DON'T DICE DICEWITH VOLAT ITH VOLA IL TY ATILITY
The wholesale energymarket is incredibly volatile and unpredictable. Prices canmove dramatically in response tomarket triggers - such as a cold snap, geopolitical instability, currency fluctuations or capacity problems. With professional help, this risk can be contained. Purchasing flexibly can be better than traditional fixed contracts because procurementmanagers canmake themost ofmarket fluctuations to buy
The obvious danger ism i advantageously when who
lesale prices dip. ssing themarke t
troughs and then purchasing energy when themarket peaks because you're only watching themarket occasionally. This is why any flexible purchasing strategy should be supported by a robust riskmanagement systemand trading strategy to limit potential losses.
A riskmanagement process/system should identify the risks to bemeasured obj
a position) amongst other for unwind time (the time
and valued, the company’s bjectives and risk limits, and the amount the buyer is willing or prepared tomis s out on Thes e risk limits or “triggers” should also account it takes to hedge factors.
2. SEEK SOUND ADVICE AND INVOLVE YOUR BOARD
SEEK SOUND ADVICE AND INVOLVE OUR BOARD
LV To implement a corporate energy risk 26 SPR 26 SPRIING 201 2017 | ENERG MANAGEMEN ENERGY MANAGEMENT managingmarket risk, an integrated
Riskmanagement is complex, so it's sensible to seek expert advice froman experienced consultant to carry out an initial forecast assessment using established and provenmodelling
techniques. This will highlight the options available and determine your appetite towards price risk.
It's important to quantify the potential risk and fully understand how a change in the wholesale energy price will impact you r energy purchasing costs. Fromthere, an optimumprice and risk strategy can be agreed, implemented andmonitored. Reputable energy advisors, and some energy suppliers, can support you.
3. UNDERSTAND RISKMANAGEMEN METHODSME HODS
UNDERSTA rward AND RISK MANAGEMENT
There are variousmethods used tomanage risk. In the case ofmarket risk, ‘forw purchases’ of different contracts will help tomitigate the risk of leaving contracts until an inopportune point. For example, you could purchase a proportion of your expected energy requirements at a fixed price for the duration of the contract, then build up the remainder by purchasing fixed-price blocks on the forwardmarket at different times. Alternatively, youmay
anage risk, saysMagnusWal er, Director of Tradi g and Risk for Inprova Energy. He sets out a five-step process to help businesses prepare a risk management plan and tradi g strategy
gy.H sets out a five-step process to h lp busin sses gy
Figure 1: To
To avoid losses and maximise gains whenmaximise gains when playing the 'lottery' ofplaying the 'lottery' of fflexible and volumelexible and volume energy purchasing, businesses must
o avoid losses and
energy purchasing, businesses must
carefully manage isk carefully manage riskr
However, complex deals, which require moremarketmonitoring, will be costlier to manage. Sometimes simpler andmore straightforw
strategies can be equally effective, if professionallymanaged by experienced teams with access to livemarket prices .
5. R SKMANAGEMEN IS CON NUOUS PROCESS
RISKI CONTIINUOUS PROCESS
Your actual risk position will change day- to-day in line with themarket, so ongoing monitoring and analysis of yourmarket position is required. As in financialmarkets, mark tomarket (MtM) principles allow you to regularly assess the risk of yourmarket position. Feedback by your professional manager on your open positions will help to determine the trading strategy
throughout your flexible contract, ensuring that you buy at the right times tomaintain energy price risk within agreed levels. What works for you at the start of the contract is likely to c hange, so regularl y review and discuss your buying strategy. Your risks to your overall energy spend will rise with increasedmarket volatility. It can be contained, but only through a properlymanaged and written risk
management solution. This should follow an in-depth assessment of your organisation's appetite for risk and procurement needs.
With an appropriate recorded and agreed trading strategy in place, procurement should be executed by a teamwith liv e market price feeds, the rightmonitoring and reporting systems, and ability to recognise changingmarket conditions.
Inprova Energy www.inprovaenergy.com
T: 0330 166 4444
/ ENERGYMANAGEMENT ENERGYMANAGEMENT MANAGEMENT IS A
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