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The Energy Market is Low – Don’t Make This Mistake

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Imagine that the energy market has dropped to an all-time low and it seems that forward pricing can’t go lower. It looks like a great opportunity to save by locking in a fixed rate. After all, prices can’t go lower, right?

Actually, history has proven that assumption wrong.

Choosing a fixed rate to cover your whole load may be the easiest strategy – and may yield considerable savings. But for medium and large energy consumers, locking in your entire price, even when the market is good, may also leave value on the table.

Market Changes Aren’t Always Predictable

A myriad of factors can cause market prices to fluctuate, and expectations or predictions don’t always prove to be accurate.

In October 2015, Texas electricity prices dropped to an all-time low. Excited by the opportunity of a great deal, a facilities manager locked in their organization’s entire power load for December and January. But then, prices dipped even lower, offering on-peak savings of $6.26 per megawatt hour. Because the facilities manager had already locked in at 100 percent, the organization ultimately paid 24 percent more than the index price.

A fixed rate may look like an easy win, but the simplicity of the solution may also cause you to pay a great deal more than necessary by missing out on additional price dips or low index prices
On the flip side, floating your entire load on an index price can be risky, too.

Remember what happened in July 2019 in Texas’s ERCOT market? Low reserve margins combined with sustained heat and low wind generation caused real-time prices to reach $9,000 for several hours and to average more than $160 per megawatt hour for the full month. Forward prices shot upward in reaction to the index price spikes. As a result, it was neither the right moment to be on a fully market-based rate or to quickly shift to a fixed rate. Yet, this sequence of events could easily happen again, so consumers must take action.

So how can you get the benefits of a low market price, while also protecting your budget from unexpected spikes?

Choose a Flexible, Customized Price

If you’re looking to optimize both your organization’s energy budget and your opportunity in the market, a layered procurement solution offers the best of both worlds. This combination fixed- and market-based purchasing strategy can even save you money in a low-priced market.

With a layered energy procurement solution, you can purchase part of your load at a fixed rate. This fixed portion is often referred to as a layer or hedge. The remaining load stays at a market-based rate until you decide to “layer in” another hedge at a fixed rate.

Some consumers incorrectly believe that they cannot achieve price certainty with a layered energy solution. But our energy strategists can help you design a procurement plan for price certainty over time, while balancing risk and reward in the market. You can purchase hedges for months or years out in the forward market, or keep part of the load in the index market.

“The beauty of layered procurement is that customers can create custom layers that are appropriate for the unique needs of their organization’s energy usage and risk philosophy,” says Hans Rottmann, Regional Manager of Strategic Sales Origination at Direct Energy Business. “Customers can lock in a percentage of their load without immediately fixing the entire amount – and that leaves them open to catch great market prices or change their strategy if better opportunities develop later.”

Layering your energy purchases allows you to reduce exposure to market volatility without fixing your entire load. The cost-saving potential makes the solution appealing to medium and large organizations, but is layered procurement necessary when energy prices are already low?

Both layered and fixed price energy procurement are effective at avoiding unfavorable market prices; but only layered purchasing provides the flexibility to continue benefiting from falling prices, as well as index market discounts. If your purchasing goal is simply to meet your budget, a fixed price solution can help you, as long as the market is favorable. However, if you want to beat your budget and reduce your energy costs, a layered price gives you a variety of options under any market condition.

“Hedging everything as a 100 percent fixed price might be safe, but a knee-jerk reaction to forward pricing is generally not the answer,” says Rottmann. “With a layered, customized strategy, and market monitoring from our energy strategists, we can help customers save.”

The Opportunity of Layered Procurement

In summer 2019, NYMEX prices reached multi-year lows with rates around $2.07 per dekatherm, but then rebounded by more than $0.60. Calendar strips from 2020 to 2025 posted all-time lows of $2.36 to $2.71, but still maintained a significant premium over spot prices. These rates may seem ideal for locking in your entire load, but if forward prices fall to the level of spot prices, you’d miss an even better price.

That’s why a gas layered purchasing strategy is ideal even when market conditions are favorable. Lock in part of your load and enjoy flexibility to capitalize on future advantageous market conditions.

Just don’t make the tempting mistake of floating your entire load until you think the price is just right. The point of layered purchasing is to lock in value during market dips to insulate your budget enough to confidently weather unexpected market jumps.

So how do you know when to buy and how much?

Expert Energy Advice at Your Fingertips

The energy market is complex; if you’re not comfortable navigating it yourself, it’s critical to obtain guidance from an expert who is both tuned into daily energy market changes and intimately familiar with your organization’s energy profile and goals. Successfully executing layered procurement requires careful decision making and precise timing. That’s where our Strategic Services team can help.

Strategic Services is our team of regional energy market experts. They get to know your organization, and then can guide you toward the ideal purchasing strategy to meet your goals. Through years of experience and constant real-time market monitoring, our team can help you design a layered procurement strategy that’s unique to your business so you’ll have confidence over the long term.

Find your strategic energy solution

 

Posted: September 17, 2019

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