Managing volatility

Magnus WalkerInprova Energy- Director of Trading and Risk

What volatility are we talking about ?Market Volatility• Price movements of the underlying gas and electricity commodity prices

that underpin energy costs specifically how much the annual price of electricity or gas moves daily in the wholesale market

• The wholesale market is where the large suppliers (Big 6) plus coal and gas generators, independent generators and trading companies buy and sell up to 4 years ahead

Why is monitoring volatility important to customers?• If short term volatility is high then making the wrong timing decisions will

rapidly impact on overall costs• Modelling costs prior to going to market will quickly be rendered worthless • Increased risk margins applied by energy companies to fixed price deals to

cover potential market fluctuations• Budgets built around such information can be rapidly out of date

Whilst commodity costs have been falling as a proportion of overall costs in electricity due to increasing pass through costs, they are the most important area that can be influenced i.e. managed by organisations through their buying approach.

Dramatic fall in price of energy in last few years

30

35

40

45

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55

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UK Power market last 5 years (£/MWh)

Energy commodity prices driven by oil prices collapsing, reduced national demand, increased global gas supplies (USA fracking, LNG), lower international coal prices

Large % increases in market in last few weeks

15-Apr-16 29-Apr-16 13-May-16 27-May-16 10-Jun-1633

34

35

36

37

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41

UK Power market Apr-June 2016 (£/MWh)

£6/MWh - Price range across period£0.4/MWh - Average Daily price change1.1% - Average Daily % change

Last 2 months volatility

£37/MWh - Price range across period£0.23/MWh - Average Daily price change0.47% - Average Daily % change

Last 5 years volatility

Volatility has more than doubled.

Historical volatility

• Impact of volatility increases not confined to electricity, gas also doubled in 2016.

• Unlikely to return to previous low levels due to changes in underlying market structures impacting market dynamics• Decarbonisation, capacity market, fuel generation changes,

globalisation of gas supplies

Annualised contracts

Can it be managed?Yes !• Needs professionally run approach to buying when markets look attractive and reducing risk

of purchasing at individual level i.e. needs real time market monitoring.• Needs strategies and limits that reflect the underlying customer base and risk profile• Needs reporting of progress against targets in a clear and transparent manner with

supporting market commentary e.g. quarterly reporting against reference prices

“UK energy contracts have steadily fallen for much of the last two years mirroring plummeting oil market prices. Brent crude prices have dropped by in excess of 50% since the summer of 2014 because of global oversupply and reduced demand projections. As a result, large quantities of power volume has been bought as late as possible, in order to take advantage of this falling market. The switch in approach by the traders, has resulted in significant savings completed for 2015 and 2016 and forecast for 2017 customers”

Professionally managed buying team take responsibilityAdvantages of PfH collective baskets:1. Customer doesn’t need to worry about making timing decisions- Traders take over timing

decisions and can take advantage of rapid price movements2. Collective public sector only basket aggregates volumes allowing multiple bites of market –

reducing risks of buying at wrong time3. Transacting at wholesale market levels(like EDF, Drax, SSE) in smaller volumes without any

supplier premium4. Feedback throughout the buying window- Reports detailing market movements, volumes

bought and projections of final commodity prices5. Defined and managed stop loss limits ensuring budget protection 6. Reduced supplier margins and risk margins- Suppliers have competed for the business7. All volume is bought, pass through costs fixed and fully made up prices known prior to

delivery commencing

Comparing to fixed price route:All the advantages (low risk, cost savings, budget protection) and none of the disadvantages (high supplier margins, unknown risk premiums built in, opaque pass through costs included)

How has our basket compared to fixed price?

Conclusions• Market volatility has increased making timing decisions even

more crucial• Need professional help to manage market volatility• PfH offer options that mirror fixed price routes i.e. budget

protection and known costs prior to delivery but with reduced risk and reduced supplier margins• PfH Collective baskets for public sector customers are low

risk and provide customer information to support internal approval and meet budget requirements• Savings can be made through flexible purchasing routes

Questions