Industry: how to evaluate your risks and make the right purchases?

21 September 2021

The evolution of power prices is causing a lot of concern among some market players. However, there is no specific tension in the European power market at the moment. Indeed, the historical power price increases we are targeting are mainly due to tensions on other energies or commodities, led by gas and CO2.

If we take the position of an industrial buyer, there is a short term impact on the uncovered periods where you have to buy at current market prices. And of course there is the eternal question: should I secure my next few years now or bet that prices will fall quickly?

We can tell you right now and save you some reading time: we don’t have the answer. No expert had foreseen this situation with certainty well in advance and, if some speculate, no one has absolute convictions about what will happen. However, there are now methods and tools to measure the risk associated with these price movements and adopt a relevant buying strategy.

Properly assessing the power price

The fluctuations in long-term prices are a reflection of the current tensions in other markets. Calculating the Clean Spark Spread and the Clean Dark Spread can already help you identify where the tensions are and what is behind the recent rise, which in this case is very clearly linked to rising fuel prices rather than tensions in the power market.

It is also interesting to keep an eye on the Spot markets (short term), which are often indicative of future tensions or loosening of the Futures markets (long term). We explained this in detail in this article last year.

Secondly, you can surround yourself with the best experts, you can only ask for advice based on their experience, reading and intuition. In view of the stakes, we could allow ourselves to go further…

It seems interesting to us to be able to construct scenarios based on various hypotheses: median scenarios, very pessimistic scenarios and very optimistic scenarios to know the range of possibilities. The plan resulting from the worst-case scenario will make you more serene about the positions taken and the scenarios that seem most credible will allow you to assess whether a price on futures is over or undervalued at a given moment.

The most important thing is to know what to expect in specific situations and conditions.

At COR-e, we value transparency as the most important step in building trust. Whatever our performance, we will always be proud to share it with our current and future clients. We will always be open to discussion and ready to learn from your feedback.

To be equipped in 2021 to gain autonomy

If energy purchasing is strategic for your company, you should know that it is now possible to have more than just tools that display market prices and their recent evolution.

Predictive solutions, previously reserved for a financial elite, are now available to you because they are much more affordable and intuitive. Thanks to advances in machine learning, the calculations are all done by the computer, the updates are almost instantaneous and the costs are lower.

Simply, if you opt for these automated models, it will be important to understand in which contexts they perform and in which contexts it is appropriate to support your market vision with other indicators. This analysis can be done quite easily with backtests over long periods and/or solutions detailing recent performance, error distribution etc. within their interfaces.

Finally, being well-equipped also means being able to get support on more strategic subjects. On this subject, we suggest you read the latest article by Ener Focus (in French) which looks at some of the main risk management methods, according to the different levels of maturity of each company with regard to energy purchasing.

Nicolas Potier
Managing Director, COR-e

Industry: how to evaluate your risks and make the right purchases?

Properly assessing the power price

To be equipped in 2021 to gain autonomy

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