In an increasingly volatile market, energy represents one of the top operating costs and a growing financial risk to most industrial and commercial gas users. Yet continuous energy portfolio management is a largely untapped and undervalued tool in managing cost and risk for many UK companies. HydroWingas Managing Director Marten Turksema explores the opportunities for gas users to optimise their energy portfolio.
The continued liberalisation of the UK energy market was the catalyst for a trend towards trading on the National Balancing Point (NBP) and many industrial and commercial gas users embraced the shift.
The purchasing strategies of these larger gas consumers have increasingly centred upon prompt or spot trading, driven by expectations of reduced energy costs, but risk awareness and risk management have not kept pace with the trend towards short-term gas trading.
Liberalisation of this market has created a more sophisticated and complex energy environment, one in which gas purchasers have many more options for meeting their energy needs. Utilising these options and optimising a company's energy portfolio, demands more sophisticated skills and a greater knowledge of the market than ever before. The days when large gas users undertook an annual tendering process as part of their yearly procurement review have been made obsolete by a much more complex and volatile market in which continuous optimisation and ongoing reviews of the new opportunities becoming available in the market, is essential.
Market Evolution and Gas Purchasing
Many interpreted the freedom of the open market as the right to choose a supplier, through annual tendering processes which replaced annual tariff setting, rather than as an opportunity to make a strategic shift towards new products and continuous portfolio optimisation.
When the market was first liberalised, this view served purchasers well because gas prices followed a downward trend and purchasers experienced cost reductions over consecutive years.
However, when prices started to stabilise and even rise again, due to flagging UK field capacity, buyers seeking to reduce energy costs became more aware of the price levels in the traded markets. Trading liquidity had developed well enough to allow for the development of credible indexes such as Heren or Argus. An easy way to ensure a price in line with the wholesale traded value of gas was to buy gas indexed on one of these daily or monthly NBP indexes.
During the winters of 2005 and 2006, gas purchasers experienced highly volatile indexes. The structural shortage of capacity in the UK, combined with the lack of flexibility to route gas from the continent to the UK or from LNG vessels to the main UK LNG terminal, forced prices to levels where demand side reductions and gas to electricity arbitrage in co-generation plants, were needed to help restore the balance. That meant prompt prices at 160p per therm in November 2005 and even 260p per therm in March 2006. Buyers faced the consequences of market exposure not only in terms of energy costs, but also with the uncertainty of the actual energy cost outcome, usually referred to as "risk".
The real benefit from the free market is more than optimising the purchase portfolio once or twice a year. Buyers in today's market have the potential to optimise a portfolio and better manage cost and risk on a more continuous basis by means of:
- Having access to the many traded gas products at NBP (through shippers' licenses and trading infrastructure.
- Having access to market analysis and expertise on the dynamics of the traded markets, to enable a short- term, mid-term and long-term view on price developments;
- Monitoring and evaluating the gas purchase portfolio against the market (expected future consumption versus market development);
- Establishing a risk policy and strategy, providing mandates with limits and guidance on forward positioning in relation to the gas delivery horizon;
- Allocating an intra-company function to follow the gas portfolio and make decisions on portfolio changes (transactions such as fixing on the forward or re-floating back to an index); and
- Producing regular management reporting on the gas purchase portfolio with the open position, expected energy cost and risk exposure, as, for example, with a Value at Risk measure (VAR).
Traditionally, these prerequisites may have not been met by industrial purchasing departments within organisations. They may see energy as primarily a utility and leave energy buying to purchasers, and maintenance or production managers.
This may lead to suboptimal decisions. Purchase managers, for example, often compare suppliers on their so-called management fees. Yet the implications on the energy costs are much more dependent on the supplier's performance during the lifetime of the supply contract. A higher fee for a high quality and proactive service provider is likely to give a much better energy cost outcome than a low fee, with a more passive service level.
HydroWingas has fully recognised these developments, and has adapted its organisation and product offerings to support customers, based on the requirements listed above.
Our customers have access to a wide range of support functions available through HydroWingas gas specialists and in the near future the HydroWingas WEB-Portal. This is the point of difference: unprecedented service quality and focus reflected in our highly skilled individual employees and in the tools we make available to our customers. Our customers and the market have never been more ready to appreciate the opportunities available to optimise an energy portfolio.
Marten A.Turksema joined the Board of HydroWingas in February 2005 and was appointed to the position of Managing Director in November 2005. Before heading up HydroWingas, he managed Norsk Hydro’s European Power Marketing and Energy Market Services Units.
|
 |
|
