Ooops we did it again?
December 1st 2008

At the beginning of January 2007, Encore announced that customers that had been risk managing their energy procurement since 2004 would pay just 7 pence per therm for gas that month. More importantly these consumers had taken 93% less risk than some of you reading this article today.

Our announcement was greeted with ridicule by the MEUC, until it became public that the companies in question were MEUC members. In fact by the end of January 2007 these clients paid less than 1 pence per therm for their January gas and by the end of 2007 only 9 pence per therm for the entire year.

In 2009 Encore already has customers that will pay just 3 pence per therm for gas and will actually receive money for consuming energy for 9 months of the year, yet once again this customer will have taken significantly less risk than your organisation.

These results are obviously at the exceptional end of the spectrum; however Encore customers that have been managing their risk for over eighteen months are on average 25% ahead of the current market prices.

Such results require little more than a change of approach in the way you think about energy procurement, the 5 key forms of organisational behaviour required to achieve the results outlined above are: Introduce a robust measurement and control process that quantifies energy price risk every day Introduce a strong corporate governance process that is supported at board level and allows your energy price risk to be managed several years into the future Stop thinking about risk as arbitrary categorisations of 'low','medium' and 'high, but put it into a simple capital allocation problem which is similar to every other problem your business deals with every day Remove the emotion from the procurement decision through the implementation of a 'Dynamic'or 'Duration'based hedging programme Introduce an effective settlement and control process to ensure that the price you think you are paying is the price you are actually paying

Ooop's you're doing it again! The irony of the results we accomplish is that they are largely achieved by customers who avoid paying high prices in the first place.

The best results are in the high prices that are avoided rather than the low prices that are achieved.

Sadly, most company's energy procurement strategies only seek help when energy prices are high and the problem already exists. When energy prices recede, as they always eventually will, the problem falls off the company's radar until high energy prices are a problem again.

No one knows whether current energy prices are high or low. They are most likely over valued against underlying oil prices, they could go higher if we continue to have a cold winter; the good news is you don't need to know if they are currently high or low. You simply need to start doing the following things: Introduce a robust measurement and control process that quantifies energy price risk every day Introduce a strong corporate governance process that is supported at board level and that allows your energy price risk to be managed several years into the future Stop thinking about risk as arbitrary categorisations of 'low','medium' and 'high, but put it into a simple capital allocation problem which is similar to every other problem your business deals with every day Remove the emotion from the procurement decision through the implementation of a 'Dynamic'or 'Duration'based hedging programme Introduce an effective settlement and control process to ensure that the price you think you are paying is the price you are actually paying.

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