Wholesale prices peaked in December 2018 before falling by 12% in the first few months of 2019. In recent weeks, they have begun to steadily creep up again across the forward curve. For many businesses, this return of volatility has created a ‘double whammy’: non-commodity charges have risen significantly over recent years, but flat wholesale markets helped to counter the increase, thereby masking the full impact on the bottom line. Defining and executing a clear risk management strategy is back in focus, but how can businesses take control?
Predicting future wholesale costs can be akin to looking into a crystal ball, but unanimous forecasts anticipate a steady rise over the coming years, with short term factors such as Brexit uncertainty looming over the market and threatening to push prices up. It would pay for any business to review their risk management strategy or holding a new scoping session to agree how best to approach energy buying in a changing energy market.
There is no ‘one-size-fits-all’ approach to energy buying. Whilst some may be tempted to lock in a fixed contract while prices are still relatively low, this could be a riskier move than adopting a more flexible way to buy.
Whilst one of the biggest drawbacks of a fixed contract is the extra risk premium built into the price of energy, a major risk is often the buying window: in our experience, many businesses choose not to fix their contract until close to the renewal date, leaving themselves with little option but to opt for the current market price and no flexibility to act on future market lows.
Budget certainty can also be achieved by multiple strategies: for example, our Options Portfolio allows businesses to place volume on a capped strategy, locking in a maximum price for energy whilst allowing freedom to move if the market falls. The ability to lock and unlock purchasing decisions is valuable in a volatile market, reducing the risky high cost of getting the timing of one single purchasing decision.
The longer the buying window, the higher the possibility that a contract can be placed at the best time – or, for flexible contracts, that purchasing decisions are placed at optimum prices across the curve.
Working with external energy experts can also make a major difference: Inenco’s trading desk closely monitor all market influences to form a view of pricing and inform purchasing decisions, from commodity markets and geopolitical movements to long-range weather forecasting. Wholesale market costs still account for 40% of the total energy bill, so optimising prices and allowing enough flexibility to act on market movements can help to counter some of the significant non-commodity charges on the bill this year, including the rise in Climate Change Levy (CCL) in April and a doubling of the Capacity Market levy for business users.
From defining a risk strategy to allowing enough time to monitor the market and place a contract at optimum time, it pays to act soon.
Talk to Inenco’s procurement experts to explore your options – give us a call on 01253 785110 or email firstname.lastname@example.org.