Basket Products and Risk
Risk management is a discipline; and it is extremely important that it is practiced diligently the moment that a business takes the decision to move away from the traditional fixed price approach to the market.
Flexible contracts deliver better risk management tools, more transparency and an improved ability to manage volatility over the medium to long term but they also have the ability to put budgets at risk if they are not operated properly. Levels must be policed, total risk positions calculated and decisions made as to how to capture value.
Our three steps risk management process:
- Identify the risks energy poses (market price, regulatory, operational, competitive landscape) and then set up a Risk Policy based upon your business objectives and in accordance with your risk profile.
- Translate the high level policy objectives into a more detailed energy purchasing Strategy (risk limits, monitoring and reporting process).
- Implement the purchasing Strategy through a defined set of Risk Procedures that ensure compliance with the policy whilst at the same time allowing for sufficient flexibility and robustness to deal with unanticipated and changing circumstances.
What are the benefits of MyUtilityGenius pragmatic, rules based, risk management approach?
- You always sign off on a well thought out strategy and tolerable level of risk
- You reduce your operational risk through the outsourcing to a skilled risk desk
- You can adapt to fit with changed circumstances and flexibly manage your volume risk (tolerance levels and cash out positions for example)
- Authority lines are clear and understood
- The ability to obtain absolute budget price certainty without being forced into a fixed price approach should this be a pre-requisite of the customer strategy
- All stakeholders’ interests are aligned. There is no conflict of interest between you, your supplier and MyUtilityGenius
The nature of the wholesale power and gas markets is such that there is a minimum size threshold below which flexible contracts are simply not available as an option for an energy buyer. The absolute minimum threshold for power is normally about 10gWh consumption per annum and for gas is approximately 15gWh consumption per annum (£1million and £500,000 respectively for approximate spend equivalents). In addition, given that one of the principle benefits of a flexible contract is the ability to spread risk by adopting a multiple purchase strategy, this minimum level doesn’t really deliver on a key principle behind flexible contracting as it still leaves a buyer with effectively one seasonal purchase per season. So from a pragmatic perspective the minimum volume on a flexible contract should be at least double the minimum threshold in order for the benefits of a diversified hedging strategy to be optimised. Unfortunately this pragmatic requirement compounds the problem of access. Many businesses for which energy price risk represents a very real and impactful financial problem are simply not large enough to participate in a risk managed flexible product and yet are big enough to be very uncomfortable with the idea of trying to pick a single day every year on which to roll the energy purchasing dice (effectively the choice that faces a standard fixed price contract purchaser.)
The MyUtilityGenius baskets present these organisations with the means to access a well thought out risk strategy that controls their risk in a managed way through a robust, rules controlled, flexible contract that has aggregated other businesses with similar strategic objectives into a single framework structure that is of the size both to participate fully in the wholesale markets and extract the margin squeezing economies of scale that are traditionally only available to substantially larger entities.
Whether you feel your strategy would be one that sacrifices annual budget certainty for lower prices, one that allows for the risk desk manager to sell back previously hedged energy into a dropping market; or one which requires absolute budget certainty and energy price lock down 3 months prior to the start of your contract year – MyUtilityGenius has an option that will work for you. The key to the MyUtilityGenius Baskets are the people, the systems and the rigorous risk and compliance processes that underpin any market engagement. You and your corporate objectives are safe in a MyUtilityGenius Basket.
This product is open to all clients over 1gWh in size and acceptance is subject to passing credit.