A nightmare on your street
April 1st 2008 The illegitimate son of 100 maniacs! That really is no way to think about your
electricity or gas supplier, but you might be forgiven given the current market prices
writes Mark Dickinson,MD, Encore International
The state of the current
energy markets is at best
dream like and for many of
you a nightmare. In the dream world
Freddy Kreuger roams slashing his
way through people's dreams and
ending their days in reality. The
current energy prices may have a
surreal, dreamlike feel,however, a
more sinister and possibly fatal
consequence for your organisation
exists if you do not recognise the
threat within and take the
appropriate action to deal with it.
If you consider energy prices for
the October 2008 contract round,
you will see that commodity prices
for electricity are £63.32/MWh and
for gas they are 69.12p/therm. All of
these prices are currently at the
historic high of their price
distribution trading and over 40%
higher than the last October round.
If you look at prices for October
2009 and also October 2010 you will
see that these levels are similar; a
200% increase
compared to
the best price
that could
have been
achieved in
the market.
For many of
you this
nightmare will
mean that
you will defer
your purchase
decision until
closer to October, for others you will
enter into a fixed price contract
because although this nightmare is
bad, the fear of a worse one is too
great.
However, as with all horror stories
it is possible that the evil can be
defeated and things return to
normal, in some cases even better
than normal, but it will require you
take different action to the way you
have procured your electricity and
gas in the past.
The current market for 2008, 2009
and 2010 looks very similar to the
evolution of the 2007 market as it
developed during the early part of
2005. This is not to say that prices
will evolve in the same way, but
rather to illustrate that you can
never be sure how things will turn
out.You need to procure your
energy in a way that reduces the
need to prejudge such things; then
perhaps your
dream might not
end up a nightmare
after all.
The figure below
shows how the
value of an energy
portfolio for delivery
between October
2006 and
September 2007
varied between Aug
2004 and the end of
September 2007.
The area highlighted in blue
shows a 140 day upward price trend
which saw the market rise 90% in
that time. For 2008 we are currently
on a 130 day upward price move
which has seen a 46% increase in
prices albeit starting from a higher
price than the 2004 equivalent.
Does this information help you
end the nightmare? Not really, in
fact maybe it indicates there is
worse to come, but that perhaps a
silver lining exists at the end. What
ends the nightmare is changing the
way you manage energy
procurement, taking a different
approach which focuses on risk
management and taking systematic
and appropriate action in the
context of your company's
corporate objective. If you do this
you can transform the picture on
the left into the picture below.
There is no magic to ending your
nightmares; it often takes a change
in approach to make it happen;
however the key steps to making
sure Freddy's reign of terror is ended
on your street can be summarised as
follows:
Don't Fix you October 2008
Position now
Don't leave your October 2008
Position exposed to the market
now
Start to manage the situation now
and let your corporate objectives
become the catalyst for how
much of your energy price should
be fixed today or at any time into
the future.
Continue to measure and control
the situation into the future
Manage your nightmares because
if you don't, you can't be sure they
won't kill you! More articles from Encore Internation: | 
