Buy Ahead to Power Up Savings on Electricity Bills
Here Daniel Turvey, Lead Energy Trader for Inprova Energy, explains for CEO Today how businesses can take advantage of some of the lowest forward electricity prices we’ve seen in ten years by purchasing ahead.
The wholesale power prices beyond 2018 are extremely low. For example, forward prices for 2021 are 10% lower than the current trading period of 2018. Looking at price averages for the previous 10 years, these current figures for 2021 are in the bottom fifth, so there’s a rare opportunity to buy cheaper than you have historically and lock-in while the going is good.
The myth of price rises
Most businesses budget for steady price rises in energy and there’s a wide-held belief that prices only go up. While it’s wise to be cautious and prepare for the worst, by looking ahead it is possible to reduce cost and risk, as the current future price outlook demonstrates. In fact, there are signs we could even see some further downward movement in the market, but with the extreme volatility of energy markets, waiting for prices to drop further could well be a gamble.
For those seeking certainty that they are buying at some of the lowest rates we have seen in ten years, my advice would be to take advantage of these historic low prices by forward purchasing a portion of future volume now and then buying the remaining volume at opportune times when there are market troughs.
Timing is critical
Evidence of extreme energy price volatility over the past 12 months demonstrates the imperative of getting timing right when making purchases. There was a 45% price swing in the wholesale power market last year, which was more than twice as volatile as the average movement of the five years prior. If you were on fixed rate contract and bought close to last year’s price peak, you could have been out of pocket by thousands of pounds. This is part of the reason why increasing numbers of businesses are sacrificing the budget certainty of fixed contracts to move to flexible purchasing.
Flex vs fixed
Flexible purchasing can deliver greater savings and be less risky than fixed products because you have the freedom to buy chunks of your energy volume at opportune times when the commodity market dips. This contrasts with the poorer fixed contract odds of buying on the best day of the year, which are 1-in-365.
It is absolutely vital to underpin your flexible procurement with a good risk management system and trading strategy. This will avoid exceeding pre-agreed price limits and incurring potential losses by hitting the top of the market with all your volume. There’s lots of ways of reducing risk, including the possibility of selling-back chunks of purchased volume and then re-purchasing at a more opportune time.
Due to the complexity of risk management, it’s wise to seek expert advice to carry out an initial forecast assessment using appropriate modeling techniques. This will highlight the options available and determine your appetite towards price risk.
Countering third-party charges
It’s becoming even more important to reduce wholesale costs because of sharp increases in third-party energy charges, which now account for approximately 55% of a bill and are expected to overtake wholesale charges by a ratio of 60:40 by 2020. Aside from reducing energy consumption and shifting peak time power use, there’s little you can do to mitigate these non-commodity charges, which is why it’s so crucial to ensure you have a smart purchasing strategy for the wholesale costs you can control.