Energy price prediction
August 1st 2009

Dark art or solid science? £15…£90…£40/MWh… What does the future hold?

PREDICTABILITY

The wholesale price of electricity is one of the most volatile price commodities in Europe.Without a strategy to overcome this risk, it is no wonder some people trading in this market have been burnt. We have seen unprecedented cost variances of over 400% in the last 5 years, which has been significant enough to catapult the energy issue into boardrooms across the globe.

Aon, the risk management and insurance firm, recently found that concern over uncertain energy prices was for the first time, listed in the top ten primary challenges facing global companies.

The question now being asked is what measures can be adopted to control exposure to future energy price increases?

RISK MANAGERS

As a result of this requirement and combined with the current global credit crisis, the role of Risk Managers and Risk Management in general has become the object of enterprise-wide reviews. Previously the domain of insurance, finance and trading, the ability to understand and manage exposure to market fluctuations is now seen as an integral part of corporate strength.

CREDIT INSURANCE

Unsurprisingly perhaps, one of the first to be hit by and react to this, have been the credit risk insurers themselves, such as Atradius and Euler Hermes.

These companies provide a significant proportion of credit insurance to Europe’s major energy suppliers and the resulting effects have seen some consumers experiencing a dramatic reduction in supplier choice and sometimes energy supply itself.

The credit situation will not be resolved quickly and in the next 24 months we are likely to continue to see high degrees of supplier caution.

When the economy begins to recover, credit ratings will no doubt improve and so too will insurance companies ability to accept greater risk. This in turn will have an impact on energy prices.

CURRENT ENERGY PRICES

Annual base load costs have plummeted since their record highs of around £90/MWh (during Autumn 2008). Regardless of the credit crunch, this was to be expected, as no market can sustain a bubble.

With average annual base load now trading at a little over £41/MWh (20% below the 3 year median) the market has gone beyond selfcorrection.

As current generation costs are around £32/MWh, there is a natural resistance to prices falling sustainably below this point.

FUTURE ENERGY PRICES

Although it is possible to purchase below generation cost at times and some downward price movement is still possible, when the world economy recovers and money markets open up, increased financial liquidity (more dollars, pounds and euros) will again chase the same amount of energy.This will inevitably push energy costs upwards.

Gains have been seen after every major slump since the 1920s, which demonstrates the cyclic nature of markets.This is likely to coincide with increased demand as the recession ends, at a time when we are predicting shortage of supply issues. So, in short, it’s not if the price will go up, but when.

Are we saying lock out for the next 3 to 5 years? Absolutely not...

TRANSPARENCY

Risk Management can often inappropriately be sold as a Dark Art.This can prevent companies from implementing the most effective strategy to provide control over future energy costs.

• We remove the mystery and allow customers to understand the mechanics of Flexible Purchasing, along with the rationale behind trading decisions.

• We believe in strategy transparency and the use of proven, sophisticated, integrated energy systems.

• We make sense of Risk Management, allowing energy procurement to seamlessly integrate with other business practises.

WHAT DO WE RECOMMEND?

• Employ a consultancy with Risk Management (RM) expertise

• Don’t get sold a price illusion – single low price months do not make an annual budget

• Don’t get caught out by over emphasis on single-model RM strategies

• Work with an organisation that has integrated systems and can provide meaningful insight, not just static reporting or unsupported spin-doctored opinion

• Form a governance group, including your procurement consultant as a member

• Avoid punitive 'take or pay' clauses - invest in accurate consumption data

• Contact BIU where we will help you integrate, rather than isolate, your energy policy

• Avoid emotive decisions - RM is a science, not an art.

ABOUT BIU

We work with some of the largest companies and organisations in the world. Our UK customers alone consume 9% of the country's commercial energy. Our expert traders rapidly analyse a wealth of market information, including minute-byminute global news. Our in-house systems, combined with 50 UK based energy professionals aligned with bespoke strategies are the reasons that our customers are currently enjoying some of the best results in the market.

TO SEE THE FUTURE OF ENERGY PROCUREMENT

Visit our stand at the Energy Event, book a personal demonstration of our Dynamic Energy Purchasing Strategy or register for one of our informative seminars by visiting www.biu.com

Alternatively, call Brenda on +(44) 01253 789816 to see how Dynamic Energy Procurement can provide your business with a competitive advantage.

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