Power and gas prices seem to have no roof …¿What now?

As we have already pointed out in previous articles, 2017 was a bullish year in the energy markets. In the previous blog “OMIE Forecast? Place your bets ” we detailed the fundamentals that justified these increases. However, this does not mitigate the concern of procurement managers who have the arduous task of optimizing costs year after year.

It is being a particularly difficult year since in 2016 a long period of sustained bearish market ended. A period that allowed companies to improve the energy expenses almost every year. However, the scenario that is drawing the first half of 2018 requires taking difficult decisions.

The power futures market already exceeds 50 €/MWh despite the long-awaited rains that have helped the recovery of hydroelectric reserves.

The entry of LNG and the configuration of MIBGAS has brought us closer to European gas hubs. And these, are also suffering a clearly bullish trend.

The oil indexed gas (most of the gas contracts in Spain) has not been the exception.

Parallel to the long bearish market period (until the first quarter of 2016), these have been years of market liberalization, which have allowed the entry of new competitors and thus reduce commercial margins, obtain more products and find competitive and innovative alternatives. All good news and from 2012 to 2017 those energy procurement managers have been the bearers of good news. A period that seems to have faded from a year and a half ago.

Right now, it is where long-term strategies and diversification have helped to mitigate the rise in costs and defend that budget increases.

Of all it is known that markets rise and fall without a clear seasonality. They do not respond to predictive patterns so any attempt to “guess” the future ends up colliding with reality. However, procurement managers always has to fight with the psychological part of his work. The word “savings” is present in the “check list” before making decisions. But as we are seeing now there is no way to report savings through markets or negotiation.

At Magnus we always talk about “optimization” instead of “saving” and we enhance that to fix in good market moments is as important as when markets go up. We are reaching price levels that few predicted, and the general trend is to postpone fixings thinking that prices will relax. “…Hope is the last thing you lose…”

This has proven to be a major error. When an energy market rises, we must continue fixing to diversify, or we risk having to buy at prices much higher than what we have seen. At the best moment we fixed prices of € 40 / MWh, and from Magnus we have been advising to fix at 42, 44, 46 …. Values that at the time seemed high. And now also at € 50 / MWh. We can cling to the idea that they cannot keep going up. But that is an act of faith, not a responsible decision.

But you do not need to resign yourself … we must keep taking decisions and there is light in the new opportunities that the market is giving us:

• Longer term contracts that would allow take advantage of the current price backwardation (long-term prices are more competitive than short-term ones)
• In the electricity market companies can participate as Direct Consumers to the wholesale market allowing them to lower energy costs, by assuming the tasks of their current suppliers. More detail in our article published in May 2017 https://magnuscmd.com/active-consumers-the-new-frontier-of-the-electric-market/
• Long-term PPA contracts with renewable producers allows to negotiate better conditions and prices below the market by assuming long term commitments. You will find more details about Power Purchase Agreement in our article published in October 2017 https://magnuscmd.com/the-ppa-phenomenon/
• Industrial consumers that have generation (Increasingly) can participate in the ancillary services of the TSO.
• The revision of the capacity mechanisms would open the doors to a new participation model through what is known in other countries as a Demand Aggregator.

In short, it is time to be faithful to the strategies, define and respect the marked limits, making brave and accurate decisions. It is also time to seriously evaluate options that so far have not been considered. Whatever the decision is, make sure you have all the information possible because there is always light after the tunnel.

Alejandor De Roca | Energy Consultant