How companies are responding to the situation
Electricity and energy prices are rising sharply. What’s more, no one can reliably say how prices will develop in the future. Added to this are geopolitical risks such as the conflict with Russia in the context of the Ukraine crisis. Nevertheless, there are solutions for medium-sized companies not to simply accept moon prices, but to find alternatives and negotiate them. A practical report from Austria, but one that can be applied to the German electricity market.
Initial situation
In the last few months, many smaller German electricity suppliers who acted as traders have gone bankrupt. In this practical report, the customer made a very favorable deal with a trader a year ago. The agreed price was 40 € per megawatt hour. However, due to the price explosion on the energy market (28.01.21: 258.58 euros/MWh after 126.56 euros/MWh for the 4th quarter 2021), this smaller provider 
also went bankrupt. As a result, the customer was informed that they had two to three weeks to find a new supplier. Otherwise, the E-Control regulatory authority for the Austrian energy market would have assigned the customer a supplier who will bill according to the spot market.
This would have been unacceptable for the customer, as prices on the spot market can be significantly higher than prices on the forward market in the medium term. While electricity is purchased on the spot market at any time at the current price, electricity is purchased on the forward market at a current fixed price for a specific period.
As a result, many small and medium-sized companies are looking for alternative electricity suppliers, but they are difficult to find due to the current high demand. In addition, the energy market is very intransparent. There are many different products, a wide variety of suppliers and speculation about the development of prices that changes daily.
Objective
1. Avoidance of the lottery and billing via spot via E-Control
It was necessary to find an alternative way within two to three weeks, otherwise the customer would have been assigned an electricity supplier and thus would have been charged a price by the spot market. The customer therefore had to react quickly.
2. Creating transparency by explaining the multitude of products and options in a comprehensible way
The prices of the various providers were made comparable to obtain benchmarks showing who offers the best price-performance ratio. In addition, a scenario of medium-term price developments was created. Although this is a look into a crystal ball, it provides a rough orientation as a basis for decision-making.
3. Establishing flexibility
The goal was also to ensure that, thanks to the transparency created, the customer does not become dependent on certain suppliers or prices in the medium to long term and that the know-how of electricity purchasing remains in-house.
4. Optimization of electricity purchasing
The price of energy differs among suppliers depending on the ratio of spot or terms markets in which they purchase themselves. Savings are possible here by finding the best possible combination of spot and terms market as well as base and peak ratio.
Excursus: Term or spot market?
When it comes to suppliers’ offers, one of the key factors is finding the right mix of purchases on the spot and term markets. For companies with a large electricity consumption, term market contracts can be advantageous, since one can then plan for the long term and is secured for the correspondingly concluded period.
The terms market, however, is a kind of bet on how the price of electricity will develop in the future. The longer the contracts concluded on the terms market, the greater the price risk. In a few months or a year, the daily electricity price on the market may well be cheaper than the electricity purchased on the terms market – and the other way around. Therefore, the risk must be spread wisely. In this case, the risk was spread by purchasing 70% of the electricity on the forward market and 30% on the spot market. This must be decided on a case-by-case basis. If the electricity is not sufficient later, it must be purchased on the spot market.
Excursus: The right ratio of base and peak contracts
The energy price you pay on the terms market is made up of a base and peak ratio. For example, one buys 90% of the required amount of electricity for normal consumption (base contract) and 10% to cover the peaks (peak contract). Base means a continuous supply of electricity, where the same amount of power is supplied every 15 minutes. In a peak contract, the same amount of electricity is delivered continuously from 8am-8pm Monday through Friday. Outside these hours and on weekends, only electricity from the Base contract is delivered.
In this case, the electricity in the Peak area is significantly more expensive than the electricity from the Base area. The right combination of Base and Peak depends on how the company’s electricity consumption looks like. Is the consumption always constant, is it fluctuating, does the consumption of electricity differ by shifts in production?
The prices for base and peak contracts on the terms market can be found in the energy price index and they do not change after the contract is signed. Here, the electricity customer must make sure that the supplier does not simply set a certain percentage for the base or peak contract but is based on the customer’s actual load. Since this does not always happen, there is a high potential for savings here if too much is purchased from the peak area. For example, one company needs 90% from the base area and 10% from the peak area, while another company has a demand of 95% base share and only 5% peak share.
In addition, the suppliers’ surcharges are negotiable. This is about 2% of the total volume.
Kloepfel Consulting was able to achieve savings in the specific case by preventing the customer from buying too much on the spot market, which is currently about 30% to 40% more expensive. At the moment, electricity is very expensive on the spot market, but this does not always have to be the case. Spot prices are expected to be very high, at least in the first half of 2022. As less heating is used in the summer, for example, electricity prices are expected to fall again. However, in view of the Ukraine crisis and the importance of Russia for the German electricity market, electricity prices may also rise.
Either way, the suppliers’ offers depend on the right mix of purchases on the spot and terms markets as well as the optimal base and peak ratio. Accordingly, a supplier was negotiated and selected.
5. Make the composition of the electricity price transparent
Create transparency by listing the cost blocks (tax and levies, grid tariff, energy price).
6. Transferring the costs to the customer’s sales calculation.
Determine how the customer can include the electricity prices in his products.
Methodology
First, the market was screened and more in-depth technical discussions were held with various suppliers to gain an understanding of the different products and price calculations. Subsequently, the time periods in which electricity is purchased were considered:
- Annual contracts (relevant for futures market only).
- Half-year contracts (only relevant for futures market)
- Quarterly contracts (only relevant for futures market)
- Spot purchase (currently significantly higher price level)
- Purchase futures market, spot or mix of both
Thanks to quarterly and half-yearly contracts, it is possible to tender more frequently in the market environment to react to market movements when prices start to fall again. For example, gas-driven electricity prices are usually cheaper in the summer because there is less heating and therefore less demand for energy. The flip side of the coin is that the shorter the contracts are, the higher the energy price index is.
It was finally decided to have an annual contract so that the issue of electricity could be retendered in the summer of 2022 for 2023 and the best combination of spot and futures market could be purchased for the customer. The reason is that prices are very unlikely to fall sufficiently in the summer of 2022 to warrant a six-month contract. The task was then to select partners worth selling to.
Result
It was possible to provide management with a comprehensive overview of their own energy procurement in a very short time: On the one hand, it was possible to better estimate the direction in which prices were developing. For example, gas drives the price of electricity during the heating season. So you can assume that the price of electricity is generally cheaper in the summer than in the winter. According to a survey, 60% of suppliers expect electricity prices to recover from the second half of 2022. By contrast, 40% do not expect this to happen, as the Greens are in government in Germany, meaning 
that cheap nuclear power in Germany is on the brink of extinction. Regarding to Nordstream 2, geopolitical conflicts with Russia may be added in the context of the Ukraine crisis. All in all, price developments are highly speculative and difficult to predict. Everyone agrees that the 2020 level will not be reached.
The customer has been presented with the entire range of possibilities and scenarios and has been given the power to decide rather than leaving it to market mechanisms.
In the end, the customer opted for a one-year contract with the purchase split of 70% on the futures market and 30% on the spot market. The 30% additional purchase on the spot market is explained as follows: The customer must define an annual requirement quantity for the futures market, this may not be exceeded or fallen short of. Exceeding or falling below this quantity increases the risk that costs will rise. The risk was spread by buying 70% of the electricity on the futures market and 30% on the spot market, in case there is not enough electricity and more is needed.
Why rely on annual contracts rather than shorter terms? There are three indices on the futures market on which the energy prices are based: Quarterly, one-year and multi-year. The one-year contracts are cheaper than the quarterly contracts. The quarterly index has such a high price base that we think even a calming down in the second half of 2022 will not close the gap with the quarterly index. We have also ensured that a tender in the summer of 2022 for 2023 is possible if prices calm down. So, we can fix the prices for 2023 in the summer of 2022.
We also made the various cost blocks of the suppliers transparent. For example, some providers were baiting us with loyalty bonuses of €15,000. Based on the newly achieved transparency, it was possible to show that the surcharges of €5 per MWh are too high for this and that the loyalty bonus was included in the calculation.
Surcharges make up only 2% of the price, here we achieved 40% savings. Furthermore, due to the better base and peak ratio, another 2% of the total price could be reduced.
In addition, the customer is accompanied in the long term to make the prices of the suppliers comparable in regular tenders on the basis of market transparency and benchmarks.
Contact:
Kloepfel Group
Christopher Willson
Tel.: 0211 941 984 33
Pempelforter Str. 50
40211 Duesseldorf
Mail: rendite@kloepfel-consulting.com