Electricity consumption usage changes and the impacts during the COVID-19 Pandemic - Part 3
Hope you found the first 2 parts of the the Bitesize Nuggets useful, if you haven't read them then please do so. Today's article covers re-forecasting for those businesses on a Power Flex contract.
In part 2 of the series I covered the contracted consumption forecast which is set prior to the start of the contract (and in some cases throughout the contract, ie splitting a 3 year contract period in to 3 x 1 year periods where the contracted consumption forecast is set prior to the start of each annual period). What happens when this forecast needs revising...
Within most contracts there may be a clause that states that should your business become aware of a significant change in consumption you are obliged to inform the supplier. A supplier should have a process in place for receiving and processing any re-forecast information. The supplier may also be monitoring forecast v actual consumption usage and could well be in touch off the back of any significant variance that they have noticed, so get on the front foot if you can.
Power flex can be a complex world and re-forecasting consumption generally leads to a revision of the required trade-able blocks of energy for your business for the period. Here is some insight on re-forecasting that hopefully is useful.
How does the contracted consumption forecast relate to the trade-able blocks of energy?
On power flex contracts prior to the start of the contract period the consumption forecast your business is expected to use for that upcoming period is broken into trade-able blocks (baseload - block of consumption covering 24 hours a day for the period, peakload - block of consumption covering period 7am - 7pm Monday to Friday) to be traded throughout the contract period based off your risk management strategy. Depending upon the flex product the cost of the forecasted consumption above/below the trade-able blocks may be captured within the shape/residual charge (standard flex products) or pass-through (cash-out products)
Diagram below shows an example of an average weekday and weekend usage and the chosen baseload consumption for that period.
Suppliers may differ in the way they optimise the proposed consumption forecast in to the trade-able blocks as it may need to align to a risk management strategy or driven by the product.
How re-forecasts may impact your trade-able blocks
On a flex contract the easiest way to apply a re-forecast is to re-adjust the trade-able blocks, however if you have fully traded these blocks and your consumption forecast has reduced this could impact the energy price you will pay as these blocks will need to be sold back in to the market and could be at a much lower price than the price they were bought at. See below example:
If you have an open position these blocks will be removed before any traded blocks are sold back, this again would impact you expected energy rate as you would no longer have these blocks to purchase. As an example if you have bought half of you tradeable volume at ￡50/MWh (5p/kWh) and had half open at current market say ￡30/MWh (3p/kWh) you would have been expecting an energy rate of ￡40/MWh (4p/kWh) but if you new forecast meant all of the remaining open was removed you energy rate would now be ￡50/MWh (5p/kWh).
Additional thoughts/Potential ideas:
- Don't avoid re-forecasting, work with your supplier, third party intermediate or seek advice from an energy expert. Help is on hand!
- There is uncertainty about how long the pandemic will last and therefore how long your consumption usage change will be so only re-forecast the "certainty" periods (month ahead) as you may have to re-forecast again if your forecasted consumption is expected to increase and have to re-buy tradeable blocks at a higher price.
- Is a baseload reduction correct for certain businesses as it may be only weekday during the day that your consumption has dropped so maybe suppliers can be innovative and sellback peak trade-able blocks as it may be more cost effective for your business. Not the normal process but these times are far from normal.
Hopefully you have this useful which will hopefully will continue to read my bitesize nuggets. Hope you have great Easter Weekend!!!
Contact details below if you would like further information.
07908 420 020
Look out for the upcoming Bitesize Nuggets:
- Impacts on future shape/imbalance costs
- Post Pandemic consumption/cost forecasting
Now retired as of June 2023. Ex Head of energy Buying at Sainsbury's
4 年Really clear and simple Michael - facing into these issues and re forecasting rather than ignoring almost certainly saves the customer money in the long term especially if you are on a cash out product
Chief Commercial Officer at Inspired. Market-leading commercial energy and sustainability advisor.
4 年Great explanation Michael. Reforesting is essential for suppliers as the over hedging sell backs in this market will be killing them. Absolutely agree customers need to get ahead of the game and update forecast to prevent nasty surprises as volume tolerance clauses are invoked.
Head of Pricing at SmartestEnergy | FMVA?
4 年Really good point here: Is a baseload reduction correct for certain businesses as it may be only weekday during the day that your consumption has dropped so maybe suppliers can be innovative and sellback peak trade-able blocks as it may be more cost effective for your business. Not the normal process but these times are far from normal.