Energy trading turns volatility threats into opportunities

Energy trading is an integral part of your procurement efforts, but make sure you have a strategy in place to mitigate risks and exploit opportunities.

Whether you like it or not, energy trading is an integral part of your energy supply efforts: are you going to keep your prices open to spot market indexation or fix them forward? If you fix them forward, will you do so once or on a periodic basis? How will you determine the maturities? Will you make prices variable when markets recover? These are all questions that the energy entrepreneur asks himself.

Energy markets

In deregulated energy markets, it is no longer the government that sets the price level, but the law of supply and demand. Wholesale markets develop through exchanges or over-the-counter (OTC) markets. Energy suppliers and producers trade in spot and forward, agreeing on prices for the next few days, months, quarters, years, etc. The market for energy is also known as the OTC market.

Suppliers ensure that their retail offers to consumers are in line with the prices they pay on the wholesale market. What is the first parameter that suppliers look for when you ask them for a fixed price offer, for example, for next year? The price at which they can buy energy in twelve months’ time on the wholesale market. The result? Rising and falling prices on the wholesale markets to which you are linked are an important factor in energy price changes.

Energy supply and demand

They are determined by a wide range of factors, which explains the volatility of prices. Numerous examples in recent years have shown that wholesale energy prices have doubled or halved in less than a year. Moreover, attempts to forecast energy prices have repeatedly proved unsuccessful because :

  • the number of factors influencing each other is very large;
  • certain key supply and demand figures are simply missing;
  • unexpected events occur.

This volatility and unpredictability means that you can never be certain that your decision to set, not set or release an energy price is timely. Volatility in the energy market is therefore a threat to your company’s bottom line. A smart energy entrepreneur will eliminate this risk and exploit the opportunities that energy price curves reveal.

Managing energy risk to survive market volatility
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