Magnus Walker, Director of Trading and Risk for Inprova Energy, has warned that the recent ten-year high power prices that was brought on by tight supply margins demonstrate that companies need to de-risk their flexible energy procurement strategies.
During mid-September prices on the day-ahead over-the-counter market increased to £135 per MWh. This is the highest level in ten years.
The price spike was largely attributed to reduced generation following unplanned outages at key coal and nuclear plants, together with low wind generation and increased air conditioning consumption, due to unseasonal mild September weather. As such, more expensive forms of power generation were required to balance the system during peak demand.
“Such price swings underline the importance of managing flexible energy purchasing within the parameters of a robust risk strategy to navigate inevitable market turbulence”, says Walker.
“Historical data suggests that, generally speaking, the energy buyer would achieve a cheaper unit rate through purchasing volume on a Day-ahead basis as opposed to annually, but this type of contract is incredibly sensitive to short-term generation and demand issues, and is a perfect illustration that buying volume on a Day-ahead basis can very quickly catch out the energy buyer.”
He advises: ” It’s easy to panic and make ’emotional’ decisions in response to price spikes, which can be a a big and costly error of judgement. A good risk management system and a trading strategy is essential to limit potential losses. This will identify the risks to be measured and valued, the company’s objectives and risk limits and the amount the buyer is prepared to lose.
“Day-ahead should be utilised alongside other contracts such as, forward-month, quarter, season etc. thus ensuring a more balanced, and ultimately less risky hedging strategy.”
Walker adds: “What is certain is that recent supply issues will not be a one off event. There are on-going concerns over the UK power system’s ability to deal with peak demand periods, particularly this winter. National Grid has forecast exceptionally tight margins for the Winter, making it likely that premium price contingency reserves will need to be used to keep the lights on.”
Inprova Energy has published a free eGuide: ‘Playing the Energy Lottery: How to Manage Risk‘.
Further information: www.inprovaenergy.com