Energy lectures 0405011

Energy lectures 0405011






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  • Sustainable energy procurement outturns are those that can be delivered across many years without:..exposing the consumer to “unacceptable” risk at any time..resulting in procurement costs above any years adopted budget..but do:..deliver the lowest possible energy cost subject to the above..minimise the costs of managing the procurement process Sustainability requires a formal structured and auditable business process that:Authors and maintains a formal written trading policy that assigns responsibility to execute it and report trades made to named authorised individuals (procurement staff)Authors, maintains and implements an effective risk management policy to police the authorised procurement staffEnsures incentives for all players are aligned and not in conflict with corporate policy objectives and/or needsSeparates the delivery and monitoring of trading policy and risk management of that trading policyCrystallises and cultivates corporate knowledge by recording actions and the evolution of policy
  • Risk Management systems are relied upon to manage large financial risks so they must:Be very high availability – always onPrimary and hot failover between separate hardware in separate secure data centers that share no single points of failure in their connectivityActively and passively monitored for failuresStores and transmits confidential data securelyMaintains multiple live backupsAccessible anywhere any time – needs to be a cloud computing applicationBe real timeCover the entire market if required – brokers and exchanges
  • Seeing the within day dynamic is crucial to realising best prices whenever you decide to trade
  • Banker payoffs were unsymmetricalBecause bankers profit from taking risk but do not suffer is risks turn bad they naturally optimise things for themselves and take more risk with others moneyWhen risks go bad we all know what happened…
  • The energy buyer is rarely incentivised to any great degree.
  • The FD is often more personally connected to procurement performance
  • Notice the relative difference between above and below budget slope. Otherwise symmetrical
  • Starting to look like a banker! Shared savings and performance bonuses’ to be avoided unless downside is shared
  • Get organised, save time and expenseAdopt formal written Trading and Risk Management policiesName individuals who are responsible for execution Monthly/quarterly review and change process, in between execute automaticallyThink about how your various stakeholders are incentivisedDraw their payoff and write down why it looks like it does as you do itSeparate risk management from position execution and both from market adviceUse system solutions to effectively implement best practice at low cost:Enable adoption of an efficient and sustainable procurement business processSpend time thinking about what you are doing, let systems do the work that keeps you busy todayEnsure reliable limit implementation – no relying on humans, the alerts cascade until actionedAutomate reporting, deliver detailed information when it is needed to trade.Record and audit real time transactions so you can see your price capture performance and the relative value of each broker’s pricesUsed to be expensive, now with thin client apps served from a secure private

Energy lectures 0405011 Energy lectures 0405011 Presentation Transcript

  • ENERGY ALERT Limited
    Bringing transparency to
    competitive energy
    How do end-users evolve risk management and purchasing strategies that are truly efficient and sustainable?
    By: Mike Coulten
    Mob: 07971 691747
    Office: 01638 508444
  • A Sustainable Procurement and Risk Management Structure
    Trading advice
    Market “forecasts”
    News/data feeds
    Real-time price
    & confirmations
    Written Risk
    Consumer Procurement Department
    Supplier Trading Desk
    And many more.
    Broker with best
    price and best liquidity
    changes over time.
    Real – time alerts
    Owners & Authors
    Info and trade capture
    Other services
    Procurement & Risk Management
    • Company Directors
    • Procurement Staff
    Separate Risk
  • Real time lock/unlock events require a new business process – get organised, save time
    Flexible procurement is an ongoing real time task
    Each purchasing event (a day, month, quarter or season) can be deconstructed to the following four stages
    Risk Policy
    Trading Strategy
    • Monitor risk metrics in real time, alert if triggered
    • Ensure real time receipt of risk metric alerts by authorised personnel
    • Negotiate the best possible price with your supplier from the many broker and exchange price’s available
    • Report back to RM policy and trading strategy owners to assist refinement of policy/strategy
    • Declare risk control metrics and systems
    • Budget limit – the maximum you will pay
    • Budget target – the price at which further risk is not worth taking
    • Declare operational responsibilities and authorisations
    • Formulate purchasing strategy to achieve target within risk controls
    Research, strategise, debate, analyse, decide - 80-20 rule
    Execute previously decided strategy – automatic and efficient
  • Capturing low prices - whenever and however you buy its still a negotiation!
    Prices are quoted across multiple brokers
    vary across these brokers by £1/MWh or more in illiquid base and peak load
    Are often unquoted for much of the day, you need estimates to avoid gapping through stop losses or buy triggers
    If you don’t:
    Ask for the best price across all the brokers you won’t get it
    Know what the short term dynamic of prices is, rising or falling, then you may miss a chance to wait and get better prices or act quickly to avoid higher prices
    What is required is a system that applies the RM and Trading Policy
    Aggregate all prices from all brokers
    Estimate unquoted prices to create a full forward curve in real time, and
    On breach of a price or MTM limit, provide second by second information on the price to authorised personnel in real time, wherever they are, reliably, every time.
    Just such systems solutions are now becoming available
    Web application so it can be accessed from anywhere including smart phones
    Secure private cloud to serve the app with SSL connections and password login
  • Reports direct to
    ENER-G clients email on any device i.e. Blackberry/PDA, PC, mobile phone
    Limit violation alerts to mobile phones
    System architecture of a very high availability risk management system
    One Or
    < 60 seconds from new
    price received to SMS
    text message sent,
    or browser window
    Cloud computing application
    • No software to install
    • Secure access from any web browser anywhere
    • Secure data held in private cloud with multiple replication and backup
    Any Internet browser anywhere
    SMS text
    Web Interface on smart phones (Android 2.2) and laptops.
  • Executing decisions with full information=Better purchasing
    See the dynamic of the within day Bid and Ask prices you are exposed to. What is the whole market really doing?
    This trade looks bad value
    There was a better price quoted at the time.
    This trade looks good value given the market
    Whenever a trade is made it can now be seen in the context of the market at that precise time and linked back to the actual individual Broker Order IDs. Although prices did fall afterwards, at the time of the trade this was a good price between the bid and ask
  • Payoff charts-a way to think about outcomes
    Bank Traders Pay
    The Banker
    Trading Loss
    Trading Profit
    Increasing Risk
    Bad for Bank Trader
  • Payoff charts – the energy buyer
    Procurement staff pay
    The Energy Buyer
    Exceed budget
    Beat budget
    Increasing Risk
    Bad for Procurement staff
  • Payoff charts – the consumer’s FD
    FD pay
    The FD
    Performance bonus
    more likely
    Exceed budget
    Beat budget
    Increasing Risk
    Potential loss on
    company stock
    Bad for FD
  • Payoff charts – the consumer shareholder
    Company profit up
    The Owner of the consumer firm
    Tax on profit
    Exceed budget
    Beat budget
    Increasing Risk
    Company profit down
  • Payoff charts – the procurement consultant
    Consultant fee
    The Procurement Consultant
    Shared “savings” or other
    performance bonus
    Fixed fee
    Exceed budget
    Beat budget
    Increasing Risk
    Consultant debt
  • Fixed contract is a special case of flexible
    Fixed Price contracting – every 1, 2, 3 years..
    Flexible contracting – tender contract once then, looking 3-5 years ahead..
    Identical exposure and process, flexible events are just real time and, potentially, more frequent
  • Summing up
    Get organised… save time and expense, 80-20 rule
    Use limits… have stop loss and buy trigger for any floating volumes
    Think about incentivisation… of your various stakeholders
    Use system solutions… to implement best practice at low cost
    Audit and review.. to feed back into policy development
    SUSTAINABLE because you are in control at all times and, with a full audit trail, can always explain how you arrived at the outturn price. Knowledge is not lost if outsourced partners are changed
    EFFICIENT because whatever the trading and risk management policy you execute it effectively and capture the best prices given the trading signals from the policy
    TRULY because you are transparent having recorded entire process and market prices from policy creation to price capture which feeds back into evolution of improved policies and strategy.