Unsecured electricity and gas price for 2022-2023, what to do?
Europe is currently in a very complicated situation. Electricity and gas prices break new records. What does this mean for energy consumers? Certainly not the same for everyone.
Let's introduce some possible scenarios and tips on how to get through this difficult period.
Case 1. I don't know the price yet, I don't even have a selected energy supplier for 2022 and beyond.
Since we have not checked the market yet and we know that in our organization, a tender is a matter of at least a month of time or two, in such a situation we should consider whether to temporarily extend the contract with existing supplier 2022. This saves time and the price can be set practically overnight. It is definitely worth checking whether the annex to the contract does not introduce additional restrictive 'deal-breakers', but it will certainly be easier and faster to verify and accept than 'setting up a new supplier in the system', negotiating the deal elements of a new contract, engaging legal resources in all T’s and C’s, etc.
However, if we are forced to organize a tender, let’s do it very effectively - it is best to ask the current seller + 2 additional offers to close the entire procedure within one week. We should be running very smoothly.
As for the price…. We do not know if calendar 2022 or shorter products in 2022 will still be in an upward trend. We know for sure that our energy price has increased drastically, so we can forget about fully controlled budgets. The problem is very complex, because energy costs do not affect all consumers in the same way, they affect competitiveness, prices of products or services etc.
Since we do not know what direction will continue, and there is a risk of even higher prices, it is worth making some decisions:
1. Short term: we consider price hedging only for Q1-22 or we make regular purchases - from now until the end of the year in the annual product. Let's not bet and wait with the decision to buy the entire year 2022 until December 2021. This could bring dire consequences. Better engage CFO and CEO in decisions here! It will also be wise now to have un-fix possibilities in your contract. Also, think about consumption reduction.
2. Medium-term: Let's draw conclusions from the current market situation (and the one from 2018) and create a long-term energy risk management strategy for the purchase of electricity, gas and CO2. Don't be surprised any more. Let's get to know the specifics of energy prices better and what influences them. Look globally and act locally. You can be like Christopher Columbus and swim into the fog. However, I recommend the route of Aleksander Doba and his kayak and go as a string from point A to point B (it will be very dangerous but at least you know where to go…). So let's mark these points so that we know how to act when a storm hits us on the way or when a very favourable wind blows in the back. Also, think about energy efficiency programs!
3. Long-term: Let's look at the cost of energy more broadly and consider how to reduce consumption, improve energy efficiency, use green energy either through own investment projects or purchasing green energy under PPA contracts (virtually or physically). Perhaps a good solution would be to install a PV's or CHP unit? How about energy storage? And again, think about energy efficiency programs!
Case 2. I am glad that I already have 40% secured for 2022, but for 2023, 2024 etc. I have nothing yet.
Consider doing things like:
1. Now let's choose a supplier for 2023 and beyond. The energy contract for the coming years will help to take advantage of temporary downturns, if any, but also to hedge without delay in the event of sudden upward movements in the market. It is worth that electricity contracts should have a "gate" regarding PPAs. Perhaps your company will consider it in the near future.
2. For some companies: let's verify the budget jump from year to year. Let's set a "stop loss" if the previous threshold level was exceeded and we did not stick to the fixings on securing up to 100% of our price that time.
3. For other companies: let's spread the remaining 50% over to regular purchases and stick to the plan. When it falls, we do not buy, and when it rises, we verify what the increase is: whether it is a fundamental, changing trend, or a "normal" move up after a downtrend session. Remember that the stock market is daily movements up and down. It is therefore worth learning to recognize the right buying signals (we use our tool: www.enerace.online).
Case 3. We have secured little or nothing. We waited for a correction because this price level is a nightmare.
Now it is the management's decision whether to wait and "enter" spot prices for 2022, or to secure prices based on quarterly and monthly products. It is worth taking the calculated risk through the prism of the most important assumptions in the strategy and the impact of energy costs on our business. It is worth asking yourself a few key questions:
1. What if prices continue to rise in 2022? How much will we realistically be able to endure? Where is our ‘ceiling’?
2. How will our competitors react when suddenly there is a huge correction in the market? Will they start lowering their product prices to be more competitive than us?
3. Can we pass the energy cost onto our client and if so, do we do it?
I propose to set up a “energy risk committee team” and talk about what is happening on the market every week. Analyse the most important changes in the electricity, gas, CO2, coal and oil markets. It is worth using various information services and being up to date.
In an uptrend, as well as in price dips, it is worth making purchasing decisions.
In the case of very low prices, we start to speculate: ‘not worth it yet, prices will fall further’. Greed is awakened in us. In the event of a rebound, we do not buy anymore. In fact, we regret a little that we did not buy these few days earlier and the fear of making a decision paralyzes us. We are afraid of explaining to the boss that we did not buy then.
In the case of increases, the situation is even more difficult. From the beginning of 2021, we are dealing with a continuous upward trend and, above all, with the price reaching new historical highs almost every week. It is extremely difficult to make decisions then, because it seems that the next day the prices should drop, and we will have to explain our purchase at historically high prices.
However, history teaches one thing: it is worth analysing this history and drawing conclusions so as not to experience similar situations in the future. So let's consider, looking through the prism of our company and our decisions, whether areas such as:
Author: Bartosz Palusiński