Sick and tired of jargon used in the energy industry?
Finding it stressful when thinking about your business’s energy?
We know how time-consuming finding energy contracts for your business is.
We understand how important it is to make sure that all your business energy needs are met. Whether that is the price you pay, how that energy affects our planet and if it is enough to keep your business growing.
This guide will hopefully give you some ideas about the energy price risk management practices in your organisation and how Niccolo can help get you back on track.
What Is Energy Risk Management?
Warren Buffet once said, “Success in life depends on our capacity to balance risk and opportunity.“
If we break energy risk management down into its simplest form, it is researching and finding the best energy recommendation for your business.
This includes identifying, evaluating, and analysing the risks that come with the unpredictability and volatility in the energy markets.
We want to guard your company against negative financial impacts with a focus on optimising your performance
When dealing with companies, energy risk management will depend on numerous factors such as price, renewable energy, sustainability and future needs for your business.
You may find some companies focusing on their environmental impact, with the risk of being perceived as a dirty, carbon-heavy company due to the use of fossil fuels.
Larger companies may have legitimacy risks, such as failing to meet the energy contracts and the overall expectations of their internal stakeholders.
Even bigger, global companies use energy risk management. You could see more focus on the regulatory risk, with every country having their own set of rules, regulations and even regional differences which can increase the risk of delocalisation.
Take the first step and contact Niccolo. we have a strong focus on the pure market price risk. We look at the risk created by the ever-present volatility of the wholesale energy markets. However, this doesn’t mean that other risks are blind to us. We consider every factor.
| Year | Wholesale Natural Gas Projected Price in GBP pence |
| 2020 | 47 |
| 2025 | 53 |
| 2030 | 59 |
| 2035 | 64 |
| 2040 | 64 |
Wholesale price projection of natural gas in United Kingdom (UK) from 2020 to 2040
Assessing Energy Market Price Risk
Do you hate unpredictability? Not knowing the outcome can be frustrating.
Think about flying on a plane, we all want to know we will get to our destination, right?
Humans have an impressive technological system, designed on the prevalence of predictability. Science is about predicting future outcomes by using the data of the present.
The same applies to the energy markets, we are trying to find reassuring predictability.
However, we must remember that the energy markets are completely unpredictable.
Take a flashback to 2011. The energy markets were stable, silent. Then, April comes around and it took a turn for the worse. Japan is hit with an earthquake, creating a tsunami off the Japanese coast.
In the same month, a German chancellor shut down eight nuclear power plants after the Green Party won an election in Baden-Württemberg.
In less than one week, there was a 20% increase in markets for electricity and gas in North-Western Europe.
When it comes to risk, there are differences.
Each company has their own individual risk exposure levels with a specific approach to managing risk.
When it comes to price fixing decisions, customers want to be reassured of prices for the next day. Even the most sophisticated, experienced energy market guru can guarantee that information. The chances of the price going up is the same as the price going down.
Taking this 50% approach when buying energy will create too much risk, often leading to failure.
If you adopt this 50/50 approach to your energy buying decisions, you may be more inclined to lean in one direction.
Does your company need a solid, trusted energy procurement strategy?
Here at Niccolo, it is about finding the moments of opportunity, by carefully observing the energy markets. We will determine the right amount to purchase, reducing the risk of any potential movements in the future market.
| Date | Electricity (baseload) | Electricity (peakload) | Gas |
| 01/12/2008 | 60% | 277% | 98% |
| 01/12/2009 | 22% | 89% | 66% |
| 01/12/2010 | 51% | 239% | 49% |
| 01/12/2011 | 9% | 44% | 34% |
| 01/12/2012 | 20% | 70% | 20% |
| 01/12/2013 | 21% | 73% | 20% |
| 01/12/2014 | 26% | 108% | 26% |
| 01/12/2016 | 85% | 425% | 41% |
| 01/12/2017 | 21% | 82% | 52% |
| 01/12/2018 | 29% | 134% | 43% |
| 01/12/2019 | 36% | 153% | 71% |
| 01/12/2020 | 104% | 515% | 68% |
Price volatility of gas and electricity
Things To Carefully Consider About Energy Risk Management
When we talk about energy risk management, we want to make a few things clear.
- Energy market analysis is not the same as risk management – Businesses unaware of the state of the energy markets run a huge risk. Having an overview of the market isn’t enough, to effectively manage your energy market price risk you need energy risk management.
- Energy trading does not equal risk management – To avoid the risk of an energy trading disaster, a key point is to separate your trading from your risk management.
- Forecasting vs energy risk management – You may find some companies taking their market analysis a little bit further, pretending that they can use statistics to know exactly what the prices of energy will be in the future. Wrong. This is false protection for your company.
- Tools to execute risk management – Risk management isn’t just applying techniques to hedge your energy. Straddles, caps, collars are floors are great, but they are just techniques and tools to execute your risk management.
- Managing your energy contract is not what risk management is – In the past, we’ve had questions such as ‘can you help us with risk management, we’ve recently signed a tranche model contract or multi-click?’. However, it is the opposite, your tools to utilise risk management are the contracts you sign.
Energy Suppliers Offering Poor Financial Services
There has been a sharp increase in energy suppliers acting as a financial services company for their clients. The energy is procured in the wholesale market for their customers, with this energy being hedged. Financial derivatives (options and futures) will be taken for these hedges in their own books.
Once these instruments move out of the market, they’ll pay the margin calls. Often, they will pre-finance non-commodity components of the bills. All of this financial service will be delivered with the knowledge that if a client goes broke, they will end up with at best, three months of unpaid bills.
It is key to remember that the energy business is one of the only industries where if there is a non-payment, the supplier cannot shut down the supply. So, it is no surprise energy companies offer much stricter credit policies.
Ever seen a contract that demanded pre-payments or shortened payment terms?
Well, that’s what consumers are facing as energy suppliers are entitled to demand these stipulations. We’ve seen cases of suppliers demanding a three-month bank guarantee if their credit situation worsens.
Just think of a company, struggling with financial stresses and making ends meet. Now they have this added risk of seeing their cash flow affected even further by an energy company cover their payment risk.
Shocking. Not at Niccolo. Speak to one of our agents today to avoid this problem.
| Date | Electricity (baseload) | Electricity (peakload) | Gas |
| 01/01/2020 | 28% | 90% | 88% |
| 01/02/2020 | 39% | 94% | 57% |
| 01/03/2020 | 44% | 153% | 69% |
| 01/04/2020 | 85% | 275% | 107% |
| 01/05/2020 | 99% | 415% | 146% |
| 01/06/2020 | 89% | 404% | 145% |
| 01/07/2020 | 41% | 94% | 91% |
| 01/08/2020 | 38% | 148% | 101% |
| 01/09/2020 | 60% | 236% | 92% |
| 01/10/2020 | 53% | 240% | 54% |
| 01/11/2020 | 50% | 221% | 61% |
| 01/12/2020 | 104% | 515% | 68% |
Price volatility of gas and electricity
Take Control Of The Energy Markets
Over the last five years, energy prices have seen more than 200% volatilities.
This just shows how important time is, as energy sourcing at the wrong moment could have a severe impact on the financial solidity of a company.
We know the energy markets are unpredictable. Some energy consumers take no action, not making any fixations at all with the worry of falling short. That is fine, but they could take advantage of the markets.
With the help of Niccolo, you can take deliberate steps towards creating value with price-fixing decisions.
Do you want to have long term energy cost stability?
What about active price management with price fixation for numerous years into the future?
Sounds good, right?
After speaking to one of our experts, then just applying a few simple adjustments, we can lead your company to better results. These simple processes can be as little as not fixing in a falling market or not fixing too much in one moment.
Active monitoring of the energy markets can help your company to fix at the perfect moment rather than during market peaks where you lose out.
This process of analysing the markets can get the ball rolling. Market analysis alone won’t give all the solutions and tell you exactly what the price will do in the future. However, it does give an understanding of the current price, as well as future opportunities to take advantage of the moment.
The excellent market analysis that Niccolo provides will be unbiased, as well as separate the less important variables from the true drivers of supply and demand.
Adopting a solid risk management practice is key and it is what we at Niccolo specialise in.
Surviving Volatile Energy Markets
Energy risk management is a necessary tool for your business. With energy markets being so unpredictable and volatile, you could see your energy costs starting to derail.
You need to expect the unexpected. You could fix your price, then markets fall. You could wait, then markets rise. These unpredictable movements of the wholesale energy markets are putting a huge risk to your company’s profitability.
However, these risks can be managed. At Niccolo, we can take steps and processes that effectively reduce and limit the risk to your financials.
Creating a thought out, well researched and expert energy risk management policy can protect your company against the chaos that is in the energy market. Our personalised, comprehensive strategies will put the foundations in place for your energy price management decisions.
Get started today. Contact one of the team at Niccolo.