15.03.2022

How to manage the risk of rising electricity and natural gas prices?

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Arkadiusz Somnicki

Member of the Board

The turmoil in the European electricity and natural gas markets has led to serious financial problems for many companies. The painful materialization of financial risk prompted the management boards of companies to revise the purchasing strategies used so far - these turned out to be highly ineffective in the face of a several-fold increase in media prices. The five-fold increase in the prices of blue fuel (from 80 to 400 PLN / MWh) over the last year and more than two-fold increase in electricity prices (from 350 to 800 PLN / MWh) posed the key question for entrepreneurs how to operate on a market characterized by high uncertainty and volatility. The answer is to emphasize the role of risk management in the enterprise and implement a media buying strategy tailored to the market.

When talking to entrepreneurs about the purchase of energy and gas, we see the following regularity. While everyone is anxiously observing the current events on the international arena, only some (this applies mainly to large enterprises with well-developed financial services) have taken action and face high prices. Fearing further increases, these companies made their first purchases for the next year (usually as part of indexed offers that allow for dividing purchases into several tranches). The others either did not think about contracting at all or consciously adopted a strategy of waiting out the crisis, hoping to lower prices in the coming months.

We will find out which strategy turns out to be right in a few months, but many years of experience tell us that usually those who do not put everything on one card and consciously manage the risk, spreading purchases over a longer period of time, win. This principle is the basis of the risk management strategy recommended by us in the company.

It is also worth taking a closer look at the activities undertaken recently (March 2022) by the largest energy and gas sellers in Poland (remember that they also buy goods under the same, difficult market conditions). To protect their financial results, these entities introduce numerous modifications to the offered products and transfer their purchasing risks to customers. We can see it, for example, in the increase in prices offered to companies and in the deterioration of other contractual conditions. Sellers differ in the level of risks they pass on to their customers, which results in an ever greater variation in their prices. Therefore, the need to collect at least a few offers from the market plays an important role in making purchasing decisions - it may turn out that our current seller is the most expensive (current price differences between sellers reach up to 20%).

In the interviews, we emphasize that forecasting media prices, even in relatively easy market conditions, gives at best highly uncertain results, let alone now, when the geopolitics of the world as we know it is changing before our eyes. Whether and when Europe will actually cut off the purchase of Russian gas, oil and coal, from whom and at what prices will we replenish the deficit of raw materials, will German nuclear power plants return to favor, what decisions will be made in the field of the European Union's climate policy, and whether it is waiting us a time of recession or stagflation - we will find out in the future. However, knowing how much uncertainty there is about each of the above-mentioned factors, and knowing that each of them is of great importance in energy and gas price formation, let us ask ourselves, should we really put the financial stability of our enterprises on one tab?

In order for the implementation of the risk management policy to be effective, it should directly translate into the media buying strategy described in the article: Between success and failure. About good and weak energy and gas purchasing strategies with a bloom of indexed offers in background.

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