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Winter is Coming – What's a Sound Energy Strategy?

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In March of 2020, the energy market experienced all-time lows. In the seven months since, prices for both natural gas and electricity have rebounded, and we are about to enter the risky winter period. 

If your contract is expiring soon, what is an appropriate buying strategy? Is it better to buy now to avoid winter risk?

Choosing a fixed rate to cover your whole load may be the easiest way to protect against winter price spikes and could yield savings. But for medium and large energy consumers, locking in your entire price, may leave significant value on the table. 

So how can you access market value while 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. 

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. You can purchase hedges for months or years out in the forward market or keep part of the load in the index market.

“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. Plus, the existing layer reduces the impact of any unexpected market rally,” says Hans Rottmann, Regional Manager of Strategic Sales Origination at Direct Energy Business.

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 and 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 conditions.


Take advantage of these opportunities 

Myriad factors can cause market prices to fluctuate, and expectations or predictions don’t always prove to be accurate. Here are strategic ways to take advantage of winter market declines and defend against market volatility.

Natural gas

The two key components of retail gas prices are the NYMEX and Basis.  Since its March lows, the near-term NYMEX has risen while long-term NYMEX for 2023-24 has moved slower and is actually cheaper than 2021-22. Also, note that except for the polar vortex in 2014, the NYMEX 12-month strip has fallen from October 15 through February 15 for each of the past six winters. The price premium for 2021 and past price trends indicate that buying just before winter may not be the best move. 

While buying near-term gas supply may not be attractive at this time, consider a long-term transaction to blend down the near-term price. An even better strategy might be to  utilize NYMEX layers (or “triggers”) to take some risk off the table during winter and buy long-term NYMEX to lock in the discounted prices available in the market for 2023-24. With this layered purchasing strategy, you can lock in part of your near-term gas load and enjoy flexibility to capitalize on future advantageous market conditions, if they occur.

Power

Some customers hesitate to buy index-priced electricity due to risk and lack of price certainty. However, index-priced electricity yields proven savings. A comparison of average yearly PJM index prices with prices available to fix during the previous year found that for five of the last six years, index prices provided an average discount of $5.22/MWh. This translates to more than 15% of the energy component of supply price.

If your business can handle some fluctuation in your monthly energy cost, consider an index price option to benefit from savings and remember that layering may still be available. The point of layered purchasing is to lock in value during market dips to insulate your budget enough to confidently weather unexpected market spikes. Layering your energy purchases allows you to reduce exposure to market volatility without fixing your entire load. 

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

 

Access expert energy advice

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.

Posted: October 15, 2020

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