Future Fit – Manage Risk and Seize Opportunity During COVID-19
As energy users struggle with life under lockdown, they not only need to ride out the immediate crisis but also prepare for the opportunities ahead as life, and energy markets, start returning to normal. Smart energy procurement and wise advice can help them manage the risks whilst they are doing so.
What’s Alfa Energy Group’s position?
We contact all our clients to make sure we fully understand their position and make them aware of their exposure. Everything is assessed on a case by case basis. Some risks are common to all users – others may be highly specific, reflecting individual circumstances. The best solution will not necessarily be the same for all.
Plunging energy prices – time to buy?
It may be some comfort to hard-pressed energy users to see power and gas prices tumbling on the wholesale markets as business and residential demand fall off a cliff. It is certainly true that anyone going to the market this year will see much lower prices than last. But is now the best time to take a position? That will very much depend on individual circumstances, including confidence about required volumes in the months and possibly years ahead.
Prices are likely to remain volatile for some time to come as the extent and duration of the emerging economic downturn become clear and markets adjust themselves to the new realities. Buyers cannot expect to know with certainty when prices will bottom out, nor when markets might eventually start to tighten as the recovery eventually takes hold. It may be more prudent for some to hedge exposure for a proportion of their expected volume until the picture becomes clearer.
Support, not pressure
The last thing energy users need right now is further pressure. Alfa Energy Group will never push clients to buy, but we will be there to support and advise those who may wish to consider doing so.
There are certainly buying opportunities out there right now for clients that are in an appropriate position to take advantage of them, but for others a more cautious approach will be more advisable. Best advice will depend on a thorough understanding of the appetite for risk, certainty or otherwise of future volumes, and individual credit risk. There is no single example of best practice to follow and decisions on how far ahead to contract, whether to opt for fixed or flexible contracts, etc., will – and should – reflect individual preferences.
Some of Alfa Energy Group’s larger consuming clients have been switching their strategies short term to aid their journey through the current environment. A challenging and volatile 2019 market environment meant some risk management strategies were affected in the short term with budgets being squeezed and CAR (Capital at risk) margins being threatened. The significantly low market level now has created an opportunity for some to take fixed prices, some at seven-figure savings for the coming year, giving them that extra bit of help in returning to normal. For example, we advised a major educational establishment previously on a flexible contract to change strategy and tender for a fixed contract to take advantage of the opportunities currently available to a buyer in their position.
What is important here is no matter how long these strategies have been in place, Alfa Energy Group is providing the options for their clients to adapt and ultimately succeed through where there is opportunity.
Some suppliers are suffering too
Currently there is still a good number of suppliers prepared to tender for supply, although that situation could change if economic conditions deteriorate. Margins for power and gas supply were thin for many suppliers even before the current crisis. Current market conditions present problems for the entire energy chain – generators, suppliers, and users.
Clients will, therefore, have to consider how well-placed individual suppliers are to meet their needs in the immediate and longer-term future as they assess new tenders for power and gas supply. Users need the right supplier for the current market and must feel that supplier will be here with them through the current challenges they face.
On the other hand, the effect on the economic environment means suppliers can also afford to be picky, ensuring they are not entering into contracts with companies who may be a credit risk. For any scenarios where this may be a challenge for particular clients in the shorter term, it is advised where possible the client looks to ensure they have contract structures in place for the period ahead. Suppliers’ credit insurers will no doubt be looking for extra cover from suppliers for their portfolios as well as tighter contract structures and, of course, larger contract margins.
Individual examples – individual risks
The majority of energy users, around 80% overall, expect to see significant reductions in their energy demand this year. Overall power and gas demand has fallen by around 15% nationally and by even more in the business sector overall. The demand reduction (or indeed demand increase, in a minority of cases) will very much reflect individual clients’ exposure to the wider economic crisis. The retail sector will be particularly badly affected by the lockdown, for example, but supermarkets may be consuming as much as before. Energy demand in the industrial sector will also be lower overall, although manufacturers with continuous processes may be less affected in the short term, unless the situation eventually leads to plant closures. The impact on those providing services to hospitals and food sectors will be very different to those supporting the aero industry – and so on.
The resulting volume risks, therefore, need to be carefully assessed on a case by case basis. Suppliers have the option to review expected volumes under the terms and conditions of standard contracts. This may have a bearing on whether fixed or flexible contracts are the most appropriate option for the future.
Where Alfa Energy Group clients could be exposed in the short term with now inaccurate volume forecasts, Alfa Energy Group has been reviewing clients’ volume requirements alongside their energy team on a monthly basis. The aim is to ensure they best reflect expectations as the economic situation changes and to avoid them facing unnecessary risk or penalty under the terms of their individual contracts, either in the short term or in the longer-term recovery period. For example, we helped a major retail client manage their exposure by reassessing their volumes with their co-operation and re-forecasting to minimise further uncertainty.
With a varied industrial client base, some clients are benefitting from these scenarios with extra volume to purchase at lower market prices, whereas many are seeing the opposite and potentially looking at extra cost than what they budgeted for. Importantly, the clients need to be aware of their exposures and opportunities and be provided with professional advice and action to limit cost impacts to their business during this already challenging period. Some clients have to deal with a mixed impact.
Delivering value to clients
Alfa Energy Group has been helping our clients during this difficult time to ensure they are best placed to weather the immediate storm and emerge from it in as positive a position as possible. Our high standards of service on procurement advice, bill validation, invoicing, environmental, and other services have been maintained through remote working and have enabled these services to carry on without disruption to our clients.
We have already delivered impressive savings to our clients during the first quarter of this year and hope to continue adding value as clients respond to the challenging economic environment. Some of our major clients are now expecting to see up to 25% savings in their power and gas bills over the year ahead – a significant help at a time when cost control could make the difference between struggling to survive the crisis and emerging from it fitter, leaner, and able to take advantage of better times ahead.