Is 'hedging' the answer to your 'large-site' power woes over the coming years? - Church Resources

Is ‘hedging’ the answer to your ‘large-site’ power woes over the coming years?

06/04/2017
Is ‘hedging’ the answer to your ‘large-site’ power woes over the coming years?

In order to manage your electricity price risk and the potentially negative impact any price increases may have on your budget, it is recommended that you consider establishing a ‘hedge’ structure.

This can be achieved by establishing a broad ‘target range’ of hedging or forward cover levels, and determining what percentage of the portfolio should be forward fixed at any given moment, and what percentage could be left exposed.

The purpose of this approach is to:

  • offset / mitigate price exposure / price volatility over the remainder of the supply agreement.
  • provide a degree of budget predictability.
  • establish a defined hedging strategy with quantifiable targets and a process for reassessment.
  • eliminate the risk of fixing the contract price on a single day.
  • provide the opportunity to purchase on market dips.
  • allow for a view on the market to be taken – e.g. minimum hedge percentages represent a bearish forward view, maximum hedge percentages represent a bullish view.
  • allow for timeframes, ‘windows,’ to layer in supply up to a chosen percentage.
  • ensure a portion of exposure is kept open to benefit from market dips / volume.

HEDGING APPROACH

To manage the forward exposure, a suggested ‘target range’ hedging profile is developed. The ‘target range’ represents suggested minimum and maximum percentage levels of combined forward volume for which the price should be fixed at any point in time on a rolling basis.

By setting target minimum and maximum percentage ranges of load to be forward hedged, this allows a percentage of electricity to be left floating and fixed nearer to the delivery quarter. Incremental purchases will be made in line with the prescribed time frames as appropriate. By adopting an incremental or layered approach, the additional hedged volumes will have the effect of averaging the weighted average price up or down dependent on the price at which they are secured.

  • MIN – minimum amount hedged / fixed for specified period. Market unfavourable / forward fixes at minimum level.
  • MID – equilibrium / no firm market view, prices fair.
  • MAX – maximum suggested percentage to be hedged / fixed for specified period. Prices historically cheap / market favorable for forward fixes.

These purchase layers provided at the outset are only a guide. Regular assessment of amounts purchased against the layering schedule will form the basis of the review process, ensuring the original market view is still valid. If a market view is formulated that requires purchasing more or less electricity than prescribed, then the model can be suspended. Full budget certainty can be provided by locking out 100% of the forward requirement at any stage. However, should market conditions become more favourable, then the target range framework can be re-activated.

PRICING ALERTS

You should consider putting in place a series of pricing alerts in order to assist you in determining the volume and duration of load to be considered for forward procurement. These price alerts will be set in relation to the ‘base case’ budget.

A trading ‘band’ can be set with upper and lower parameters that would allow you to consider its procurement options based on the prevailing market prices. A 5% plus / minus trading band can be set in increments of 1% around the base budget in order to provide an upper ‘stop-loss’ and a lower ‘take profit’ level against which daily pricing for each of the forward quarters can be evaluated.

Should any of these numbers be ‘triggered’, Church Resources and our Energy Partners will engage with you to determine whether a purchase should be made.

In the case of a rising market where prices continue to trend upwards, additional purchases should be considered in order to mitigate the chance of breaching the ‘stop loss’ limit. Should the ‘stop loss’ level be reached, then you should consider locking out all remaining volume exposure.

By putting in place a series of 1% price increments, this allows our partners to identify for you, price movements so that you can go through a structured decision making process internally to consider and determine what actions should be taken in relation to procurement. It does not mean that an automatic purchase is required or will be put in place. By adopting this approach, it will allow you to manage its exposure and consider whether the parameters of the trading band are appropriate.

You would be given the option of taking up a flexible price contract (progressive purchasing contract) or a fixed price contract. If a flexible price contract was required, our Energy Partners would engage with retailers to obtain offers from each of the major retailers offering a product. Our Energy Partners would then evaluate the advantages and disadvantages of each product and recommend the most suitable one to you. Once a contract had been put in place, the hedging strategy would be developed as outlined above.

You would need to approve the target range hedging profile and pricing alert levels. Thereafter, we would be monitoring the market to determine when hedging should be considered. When we were of the opinion that a percentage should be hedged, we would contact the retailer to determine what price was available for the particular period and load in question. Once this was obtained, we would call your nominated contact and any other stakeholders and have a call to discuss the reasons for a hedge and obtain approval to proceed. Usually, approval to lock in a price would be required the same day but if this was not possible during the call, approval could be given to the price quoted plus allowance for a small increase, in case pricing went up in the time it took to make a decision.

If the hedging strategy was to be built around your corporate budget, then our Energy Partners would need visibility of the budget at the outset of the program.

Church Resources and our Energy Partners are leaders in supporting the Church and not-for-profit sectors maximise savings on their energy and utility programs. Call us today on 1300 248 724 or make an inquiry below.