Optimizing Energy Retail Portfolio Management

Sep 7, 2023

How are the energy retail trading portfolios worldwide affected by today’s rapidly evolving geopolitical trends?

With today’s geopolitical environment dynamics, global supply and demand become more imbalanced and prices get significantly volatile. Traders, portfolio- and critical account managers around the globe are facing significant challenges with the optimization of their positions, contracts and margins. The latter demands new approaches and quick reactions to changing trends for retail to stay profitable in a highly risky and uncertainty-dominated environment since the management of margins is one of the core businesses for every utility and is closely connected to procurement, especially for short-term forecasting, and balancing.

Over time, utility companies opted to offer fixed-price contracts with purchase costs transferred from the procurement to the key account management/retail business which has become the standard choice. Those fixed price contracts are either with a base price/subscription fee and an energy price per kWh for the consumption per year, or a mixed price for the whole contract period.

Some utilities use portfolio prices, meaning overall purchases for a particular segment or company-wide accounting also for the open positions, and some use volume-weighted (settlement) price forward curves for that purpose. No matter what approach is used for calculation and passing further the costs to the ultimate energy consumers, this kind of contract bears significant risks for both parties: the utilities and their customers. The risk for the utilities can be covered by add-ons and minimum margin requirements, however, in periods of high price volatility those may not be enough to compensate for all possible risks or may need to be adjusted frequently enough or set at such high levels that the price calculated at the end may not be competitive and customers may be lost. On the energy consumption side, fixing the price for the future (one or more years ahead) at one point in time may result in significantly higher costs should the contract be signed in a period of high market prices. In times of quickly evolving renewable policies and more projects coming to realization, it is already a standard to offer green products to customers to be a part of and support the energy transition. With the intermittent generation of renewable assets, the different sources and the pricing of certificates and purchase agreements, this is another complexity added on top of the energy price risks.

What problems are worth solving and how can we approach them?

To tackle the needs of all parties in the retail business and optimize their management processes, more flexible solutions are needed, both in terms of business processes and IT (systems) solutions. During times of economic crises and high uncertainty respectively volatility, spot market or tranches-based models (or mixed ones) become more widely used to transfer or spread price risks over a larger period, with price formulas with base/peak shares and a fixed add-on replacing PFC or fixed price calculations. To close open positions created by new contracts on both sides (retail and purchase), calculation tools are needed to determine the optimal portfolio decomposition and hedging suggestions. In some cases, purchase hedging can be executed back-to-back and in real-time respectively, directly after (partially) fixing the price for the end consumers. With all the above, the complexity of handling a portfolio of customer contracts resp. retail segments have risen significantly and the need for IT solutions for process automation becomes imminent. Therefore, ETRM systems and platforms need to offer functionalities for:

  • Persistence: Master data such as offers, contracts, counterparties, and delivery locations; calculation and persistence of margins, price and cost components, price formulas, horizontal (different periods) and vertical (different shares of total consumption) tranches, based on fixed, calculated, spot, index, or settlement prices (although the latter are rarely offered in high volatility period due to the high market risk)

  • Forecasting: Future consumption and handling of actuals

  • Calculation: Decompositions, balancing energy; Editing of formulas and tranches as well as management respectively notification for such due for execution

  • Valuation: Open positions and handling of different volume types and bases for calculations (actual forecast, initial forecast, schedule for the future); Management respectively scheduling of spot positions

  • Management and pricing: Certificate inventories; Coupling of retail and purchase portfolio management processes (real-time position management)

The needs are strictly dependent on the nature of the business of every customer/utility and require a careful examination of its processes, strategies, and systems to provide an optimal solution.

As always, the devil is in the details.

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