ADVICE & OPINION
SAVE YOUR ENERGY
FMJ AIMS TO SUPPORT TECHNICAL EXPERTISE IN THE FM MARKET
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There are many factors which will
contribute to fluctuating energy
prices; but it is best explained by
looking at where the energy is being
generated from, and how much we
rely on imports to satisfy immediate
demand. There has of course, been
a significant increase in renewable
energy, as shown below, taken
from the Digest of UK Renewable
Energy Statistics produced by the
Government, which is also expected
to rise further as we move to a low
carbon economy.
This is great news in terms of
sustainability and the security of supply
due to a reduced dependence on
imports; but the supply itself is more
volatile. If there is minimal sunshine and
wind, the energy being generated and
fed into the national grid will be severely
a ected. At times with minimal supply
and high demand prices will be inflated.
On a more positive note, the opposite
may be true. There may be very high
generation from renewable sources with
average or low demand on the grid. In
such cases the short term price of power
will most likely be extremely low and
possibly even negative if there is a need
to take the power o the grid. This was
seen in the UK on 14th January 2018.
Wind output was extremely high and as
it was early on a Sunday morning, the
generation outstripped the demand, so
prices fell into negative territory as the
grid needed to be balanced by shutting
o turbines and moving the power o
16 APRIL 2019
the grid.
This inflexibility of renewables is not
the only driver behind more volatile
pricing. Another major contributor is
the closure of Centrica’s Rough Facility.
Historically Rough acted as a backup
to the UK demand for Gas by storing
up to nine days’ worth of Gas at any
one point. Due to the high availability
of LNG (Liquified Natural Gas) from all
over the world at comparatively cheap
prices, it was decided by Centrica to
close the site rather than upgrade/
renew it. Although there is debate
surrounding the
overall impact this
has had/is having
on pricing and
supply security,
one thing that has
certainly prevailed
is an increase in
volatility of the
movement of daily
Gas prices.
HOW DOES THIS AFFECT THE
END CONSUMER?
For those purchasing “flexibly”, the key
is in understanding data. The pressure
on an energy purchaser has now
increased significantly as markets may
move extremely quickly. It is therefore
vital that access to current pricing
is available, as well as the ability to
monitor it over extended periods of
time. On top of receiving the data, the
consumer must have a knowledge of
what is driving any change in pricing
and work out what the impact is
on their business. For example, not
only should an assessment of the
likely driver behind price changes be
considered in terms of the length of
time it will continue, but also what is
the impact of delivered cost? If Power
moves by £1 per MWh – what does that
actually mean to the end consumer’s
monthly invoice?
This understanding is not just vital
for the management of risk when
prices are increasing, but also when
taking advantage of the opportunities
when prices reduce. By having a
broader understanding of the impact,
it also becomes much easier to
communicate with those stakeholders
across the business who are not
involved with energy purchasing, but
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are heavily invested. For example,
members of the board or a financial
director will need to make plans
based heavily on the cost associated
with, and budgeted for energy. By
immediately understanding the
delivered cost, decisions can be made
far more easily and quicker, which is a
necessity when purchasing flexibly in
a volatile market.
DIGITISATION…
Digitisation of data is essential
to allow those responsible for
purchasing their company’s energy
to have the best possible chance
of mitigating their risk and taking
advantage of the opportunity that
a volatile market will bring. Time
cannot be spent gathering data to
assess the impact of any price or
consumption fluctuation, it must be
available instantly to enable sensible
and well thought out decisions to be
made. This can then lead on to risk
forecasting and strategy…
RISK MODELLING AND
STRATEGIC PURCHASING
With the data available for both
consumption and pricing, the
ultimate goal is to work out the best
purchasing strategy that fits in with
the appetite for risk and maximising
opportunity. The million dollar question
is always “what is a good price?”
Di erent consumers will have di erent
answers depending on what needs
to be achieved when setting out their
purchasing strategy. For some, the key
is minimum risk with the acceptance
that locking in large proportions if
not all energy, may result in a higher
average price, but it does allow budget
certainty. For others, there is a greater
need to drive down pricing and take
advantage of opportunities when they
present themselves to ensure market
competitiveness.
Wherever an organisation sits on this
spectrum, choosing a strategy that
reflects their aspiration is vital. Doing
nothing, leaving to run to spot, is a
decision, but is increasingly risky in a
tight supply market.
To help guide a strategy – not only
must the appetite for risk be assessed,
but also the future prices modelled/
market sentiment understood. It is very
true that no-one can predict the future,
however even basic risk modelling can
help identify the likely price fluctuations
and therefore the relevant impact on
a business’ bottom line. Again, if this
is linked to the digitisation of data, it
will allow for very quick decisions and
changes to a strategy based on what a
model may be showing.
A well evaluated, well informed
strategy must be chosen, one that
considers internal risk appetite,
potential to take advantage of
opportunity and market sentiment/
forecasts for the future. This is a
huge task for an individual to take on
without the necessary data, which is
why digitisation is a must, by enabling
you to take analysis to the next level
through modelling price forecasts and
even machine learning which helps
speed up such forecasts.
Volatility brings both risk and
opportunity, winners and losers. The
winners will have the most knowledge,
access to data and ability to react most
quickly… or just be extremely lucky.
FAST FACTS