Single Price vs. Layered Hedging
Is it better to "set it and forget it" or deploy an active energy management strategy?
Since the inception of deregulation, the free-trading energy markets have encountered an array of companies offering different types of energy management services. Many large users of energy have turned to doing business directly with an energy supplier, while some are working with brokers and consultants.
Nevertheless, the market has moved to selling fully-bundled fixed price terms. Power forward curves have been trending downward for the last decade, and buyers have been able to lock-in lower prices contract-over-contract. Moreover, with many new, less sophisticated market participants, selling a fully-bundled fixed price became the path of least resistance. Brokers are making big commissions in exchange for very little effort. If it's not broke, don't fix it, right?
Recently (over the past 4 years) we have seen future prices hit many historic low's. In March of 2016, we saw prices bottom-out, and again in August 2019, and again just recently. It seems as if we have reached the floor and prices are relatively range bounded, occasionally setting new lows. So the elephant in the room? Should you keep buying standard fixed pricing or is implementing an active hedging strategy a better route?
The answer, in our opinion, is "it depends". If you are a relatively small energy consumer and you want to focus on other more pressing issues (like staying in business during the Covid outbreak), locking-in a fully bundled fixed price at a "good" rate might be your best bet. On the other hand, if energy costs are a significant line item on your P&L and trying to cut them while acting responsibly is your M.O., you might want to consider an active strategy.
Active energy price management is a strategy used by some of the largest energy consumers on the planet (think Walmart). It means setting budgetary goals, calculating price targets, and monitoring the futures market to hedge at or below those targets. Layering hedges at opportune times allows you to dollar-cost-average your way into a fixed position, eliminating the risk of locking all of your costs in at the wrong time. Simple? Not really.
Choosing the right consultant, broker, or supplier to help you execute your strategy is paramount. Some large suppliers are better equipped to handle these transactions, while many times smaller suppliers do not have the resources. You also need access to the best data and tools in order to responsibly execute an active energy management strategy.
At Puleo Energy, we have the external and internal resources that allow us to aid our clients in this journey. Want to discuss your options? Book a time to talk by clicking here.