Energy markets are unpredictable. Energy risk management is therefore an indispensable component of your energy supply toolbox. Chaos theory is a better guide to energy trading than forecasting attempts. Expect the unpredictable. If you set your price, markets could fall and you could lose competitiveness. If you don’t, the markets could go up and your energy costs could skyrocket. From this point of view, unpredictable movements in wholesale energy markets jeopardize the profitability of your business. If you try to fix everything at the right time, you maximize this risk.
While we cannot use forecasting to limit your exposure to volatile energy prices, we can take steps that effectively eliminate the risk to your bottom line. However, it is important to first understand how your business is affected by unexpected changes in energy prices. What is the predominant impact: rising or falling prices? Once the major impact is identified, you can make the right decisions about setting, not setting and releasing the price.
No strategy can guarantee you the best price every time. That said, a well-defined and well-executed energy risk management policy can effectively protect your business from the vagaries of the energy markets. A comprehensive strategy will set the framework for your energy price management decisions.
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Stay ahead of the markets with energy price management
With energy price management, you decide when prices are fixed, not fixed or fluctuating. Energy markets are unpredictable. Some energy consumers therefore decide not to fix anything. Their price is tied to an average wholesale spot or futures value. And yet… Making informed pricing decisions can create value. If your strategic goal is to achieve long-term stability in your energy costs, active management with pricing over several years will lead to better results than simply averaging prices.
Nobody can claim to “always beat the market (on average)”. But the application of a few simple principles, such as not fixing too much at once and not fixing in a bear market, can lead to good results. Of course, the back bias is always 20/20 when it comes to pricing. But active monitoring of energy markets can help you fix at the right time rather than during market peaks.
Energy price management starts with market analysis. Market analysis can’t tell you how the price will evolve in the future. But it does help you understand current price fluctuations and allows you to identify opportunities. Good market analysis is unbiased and global in nature. It distinguishes between the real drivers of supply and demand and the less important variables.