There are always different risks associated with business, especially in electricity sales. Electricity storage is challenging, there is volatility in purchase prices, margins are small and volumes large. When an individual risk materializes, it can turn into losses of hundreds of thousands – or even millions – on an individual company. It is therefore understandable that risk management is a matter of great interest and electricity suppliers take it seriously.
So how do you manage risks in the best possible way? First, risks must be identified, one cannot protect oneself from something that is unknown. The current situation of your company – in terms of volume and prices – must be known. Information should be readily available at different levels in the organization and structured in different ways to respond to different situations in a timely manner. Reports must be generated automatically and digitally, since manual reports are either not up to date or unreliable in content.
Price and Volume Risk
The companies are generally aware of the risks related to electricity trading. Of course, market price risk comes to mind first, for the simple reason that this has been very strongly on the agenda in the international media during the autumn. There may be a situation where you sell at a lower price today, and then buy the electricity you sell at a higher price in retrospect. Price risk can be reduced by hedging the purchase price of electricity in advance, either through bilateral agreements or by using derivative instruments. However, pre-acquisition or hedging of the acquisition price exposes the seller to volume risk, in which case purchases and sales are not in balance with the actual amount of consumed energy. The customer’s electricity consumption is assessed in advance, and the actual outcome may be something else. The single largest variable for consumer customers with electrical heating is the outdoor temperature. For corporate customers, the economic situation and, for example, the corona pandemic can have a major impact on the company’s operations and the projected electricity consumption.
For energy sold at a fixed price, the seller is also exposed to profile risk. The market price and the customer’s electricity consumption can vary a lot for individual hours. Typically, on an annual basis, differences level off and settle at a certain level that can be considered and forecasted at the quotation stage for an individual customer or group of customers. However, the future looks interesting in terms of market price developments, climate change (mild winters) and the increasing electrification of everyday life due to, among other things, carbon neutrality targets and the increase in renewable forms of electricity generation.
Of course, I also need to mention the imbalance risk, which is having an increasing impact all the time. The transition to 15-minute imbalance settlement in the spring of 2023 is likely to increase the significance of balance sheet risk as part of profitable pricing of electricity contracts.
How can Enerity™ Help You with Risk Management?
What comes to market prices and customers’ use of electricity, Enerity™ cannot offer a magic wand to whish away unwanted trends and behaviors. However, what Enerity™ can do, is provide effective tools for identifying and managing risks, as well as the opportunity to sell and trade electricity profitably for corporate and consumer customers on the low-margin and high-risk electricity markets.
We will be happy to discuss with you further about the benefits of Enerity™.
Sales Manager Markus Helvasto