Driving procurement excellence in volatile markets can be challenging and we have to know how to offset the risk to ensure best value is obtained. In this session we take lessons from one of the most volatile markets and will hear challenges and experiences to offer practical insight.
2. What volatility are we talking about ?
Market Volatility
• Price movements of the underlying gas and electricity commodity prices that
underpin energy costs specifically how much the annual price of electricity or
gas moves daily in the wholesale market
• The wholesale market is where the large suppliers (Big 6) plus coal and gas
generators, independent generators and trading companies buy and sell up
to 4 years ahead
Why is monitoring volatility important to customers?
• If short term volatility is high then making the wrong timing decisions will
rapidly impact on overall costs
• Modelling costs prior to going to market will quickly be rendered worthless
• Increased risk margins applied by energy companies to fixed price deals to
cover potential market fluctuations
• Budgets built around such information can be rapidly out of date
Whilst commodity costs have been falling as a proportion of overall costs in electricity
due to increasing pass through costs, they are the most important area that can be
influenced i.e. managed by organisations through their buying approach.
3. Dramatic fall in price of energy in last few years
30
35
40
45
50
55
60
65
70
75
15-Jun-11 15-Jun-12 15-Jun-13 15-Jun-14 15-Jun-15
UK Power market last 5 years (£/MWh)
Energy commodity prices
driven by oil prices
collapsing, reduced
national demand,
increased global gas
supplies (USA fracking,
LNG), lower international
coal prices
4. Large % increases in market in last few weeks
33
34
35
36
37
38
39
40
41
15-Apr-16 29-Apr-16 13-May-16 27-May-16 10-Jun-16
UK Power market Apr-June 2016 (£/MWh)
£6/MWh - Price range across period
£0.4/MWh - Average Daily price change
1.1% - Average Daily % change
Last 2 months volatility
£37/MWh - Price range across period
£0.23/MWh - Average Daily price change
0.47% - Average Daily % change
Last 5 years volatility
Volatility has more than
doubled.
5. Historical volatility
• Impact of volatility increases not confined to electricity, gas also
doubled in 2016.
• Unlikely to return to previous low levels due to changes in
underlying market structures impacting market dynamics
• Decarbonisation, capacity market, fuel generation
changes, globalisation of gas supplies
Annualised contracts
6. Can it be managed?
Yes !
• Needs professionally run approach to buying when markets look attractive and reducing
risk of purchasing at individual level i.e. needs real time market monitoring.
• Needs strategies and limits that reflect the underlying customer base and risk profile
• Needs reporting of progress against targets in a clear and transparent manner with
supporting market commentary e.g. quarterly reporting against reference prices
“UK energy contracts have steadily fallen for much
of the last two years mirroring plummeting oil
market prices. Brent crude prices have dropped by
in excess of 50% since the summer of 2014
because of global oversupply and reduced demand
projections. As a result, large quantities of power
volume has been bought as late as possible, in
order to take advantage of this falling market. The
switch in approach by the traders, has resulted in
significant savings completed for 2015 and 2016
and forecast for 2017 customers”
7. Professionally managed buying team take responsibility
Advantages of PfH collective baskets:
1. Customer doesn’t need to worry about making timing decisions- Traders take over
timing decisions and can take advantage of rapid price movements
2. Collective public sector only basket aggregates volumes allowing multiple bites of
market – reducing risks of buying at wrong time
3. Transacting at wholesale market levels(like EDF, Drax, SSE) in smaller volumes
without any supplier premium
4. Feedback throughout the buying window- Reports detailing market movements,
volumes bought and projections of final commodity prices
5. Defined and managed stop loss limits ensuring budget protection
6. Reduced supplier margins and risk margins- Suppliers have competed for the
business
7. All volume is bought, pass through costs fixed and fully made up prices known prior
to delivery commencing
Comparing to fixed price route:
All the advantages (low risk, cost savings, budget protection) and none of the
disadvantages (high supplier margins, unknown risk premiums built in, opaque pass
through costs included)
9. Conclusions
• Market volatility has increased making timing decisions even more
crucial
• Need professional help to manage market volatility
• PfH offer options that mirror fixed price routes i.e. budget protection
and known costs prior to delivery but with reduced risk and reduced
supplier margins
• PfH Collective baskets for public sector customers are low risk and
provide customer information to support internal approval and meet
budget requirements
• Savings can be made through flexible purchasing routes
Look in more detail at market movements in last few months as part of this consideration of impact of volatility
Last month seasonal power contracts averaged their highest levels since December last year with the winter 16 contract averaging a six-month high of £40.2/MWh. At the same time the continuing costs of supporting policies such as the feed-in tariffs and the Renewables Obligation will soon be supplemented by the costs of contracts for difference and the capacity market.