The energy industry is in a state of emergency: Historically high electricity prices, contracts are being terminated and new customers are only being offered energy at very high prices.
Especially in uncertain times like these, when the price of electricity is jumping from one all-time high to the next at breakneck speed, the procurement of electricity is becoming an increasingly important issue. Because we want to continue to avoid unrestrained price increases. In the following, we explain how this works, why risk hedging is ahead of electricity hopping, what our procurement strategy looks like and, above all, why energy delivery is still a matter of trust for us.
How does the procurement of electricity work?
As a rule, electricity in Germany is procured via the wholesale market. A distinction is made between two types of procurement: short-term and long-term electricity procurement. The amount of electricity, the procurement period and the time can also be determined independently of one another in the procurement strategies.
Short-term electricity procurement
With the short-term procurement of electricity, the electricity purchase price is close to the current market price. Because of the short-term or the procurement on the spot market, the electricity is only purchased shortly before delivery. What are the benefits?
- If the electricity is procured at short notice, it is possible to forecast the electricity demand more precisely.
- In addition, better prices are sometimes possible at short notice.
On the other hand, larger fluctuations have to be accepted, a forward-looking and reliable price calculation and planning is not possible. Relevant prices can only be named at short notice.
Long-term electricity procurement
In the long-term procurement of electricity, the price can deviate positively or negatively from the current market price. Because the required amounts of electricity are purchased years in advance in several partial quantities. What are the benefits?
- The risk is minimized by the early and split purchase and therefore a high price level is avoided.
- Greater budget security can be guaranteed within the contract period.
- Price fluctuations on the wholesale market have a less risky impact on electricity procurement.
The periods during which electricity is procured depend on the contractual agreements. The long-term procurement of electricity also ensures long-term planning security, which is of particular interest to end users who are less dependent on energy costs.
Energy costs at a long-term high
Flexible procurement instead of a fixed price creates opportunities.
What are the current challenges in power procurement?
The challenge when procuring electricity is always to find the best time to buy as cheaply as possible. This is of great advantage for energy-intensive companies and industries, since even small price changes immediately have an impact on the costs of large consumption quantities. Especially timely as electricity prices jump from one all-time high to the next. By procuring electricity at the optimal or most cost-effective time, it is possible to benefit from the volatility of the electricity price.
Risk protection instead of electricity hopping
In order to secure profit and livelihood, it is therefore more important than ever not to switch from one electricity provider to the next or to rely on short-term electricity procurement. Instead of power hopping, it is considered a sensible strategy to develop innovative security mechanisms and to practice active risk management.
In the fourth quarter of 2021, the energy prices for the delivery year 2022 rose significantly to up to 20 ct/kWh, plus network charges and levies. Above all, companies from energy-intensive industries are severely affected. The winners of this crisis are clearly those who have planned for the long term through structured energy procurement and fixed electricity prices in recent years. Like us.
Strategic electricity procurement: The Areva procurement strategy
In order to enable prices below the market average, a dynamic approach to electricity procurement is important. So that we can continue to avoid unchecked increases in electricity prices, we rely on a combination of short-term and long-term electricity procurement. In this way, the procurement risk is split and a large proportion can be secured in terms of price while still benefiting from spot prices.
Basically, we offer different procurement models because we want to be able to guarantee individual energy procurement for each customer. The customer-specific procurement strategy is what sets us apart, as we not only rely on short-term, inexpensive electricity procurement for our customers, but also develop a long-term strategy together with our customers.
To this end, we discuss the following points with our customers:
- What is the risk tolerance?
- How’s the deal?
- What must be considered when it comes to the energy supply?
When supporting our customers on the subject of electricity procurement, we draw on 20 years of experience and are always available as an advisory partner. Similar to fund managers, we analyze the past, draw conclusions from which we can learn and look to the future. How will the market develop? In this way, we can derive which procurement methods benefit our customers, how we can continue to minimize the risk, and finally make our findings and recommendations available to our customers to choose from.
How can we?
Our traders have access to all important energy trading places, constantly monitor current market developments and compare the prices on the exchange with the offers of the energy traders in order to always be able to act quickly and procure the electricity as cheaply as possible.
Another means of minimizing the electricity price risk, which more and more companies are opting for, are power purchase agreements based on new solar or wind farms. In addition to the procurement methods already mentioned, these can secure part of the electricity procurement.
PPA as a solution for secure electricity procurement
Not only the partially secured electricity procurement is an advantage of a PPA. In addition, companies know exactly which sustainable and regional sources their electricity comes from, in line with a good sustainability strategy.
But what are PPAs and why are they so well suited to hedging electricity prices?
Power Purchase Agreements – orr also known as PPAs for short – are electricity contracts between electricity producers and electricity consumers or electricity traders that can be concluded at fixed prices. As a long-term variant, PPAs are mainly linked to the generation of energy from wind or solar parks. Operators of systems that cause high investment but low operating costs create a secure payment for the electricity through PPAs.
Not only do PPAs promote the expansion of renewable energies, they also reduce the carbon footprint in the electricity sector. Companies with a large electricity consumption thus have the opportunity to partially hedge against long-term price increases, which are to be expected in the future as a result of the coal phase-out or CO2 pricing.