Hedging Strategies for Electricity Suppliers | Green Tiger Markets
Simply put, the goal of an Electricity Supplier is to maximize the return of their asset — the generation plant. To do this, they want the plant to run for as long and consistently as possible. They also want to be able to sell everything they produce at a good price.
So how can a business-to-business platform that facilitates the forward hedging of electricity prices help maximize returns?
Since the beginning of 2020, the monthly load-weighted average price for electricity has fluctuated between 1,336 to over 3,500 PHP/MWh. Selling power into the market leaves the Generator open to wide swings in revenue.
Electricity Generators can join the Green Tiger Markets (GTM) platform, which is a Business to Business platform that facilitates the forward financial hedging of electricity prices by matching platform participants who have opposing price risk management needs. Participants (who are either “buyers” or “sellers”) enter into Forward contracts with other Participants (who are either “sellers” or “buyers”).
GTM publishes the market transaction data so Participants have transparency into the transactions as well as the bids/offers of other GTM Participants.
The Generator can sell contracts representing their plant’s generation and thereby lock in its price so they are hedged against price fluctuations. Standard hedging practice is to offer between 70% and 85% of a plant’s capacity through monthly contracts for the next few years. Throughout the current month, the Generator can watch the activity in the daily and weekly contract markets and dynamically buy or sell into the market at favorable prices.
Optimizing Planned Maintenance | Green Tiger Markets
Plant maintenance has a significant financial impact. There is the cost of the maintenance, the ramp down/up cost, and of course, the lost revenue from not running. Determining the best time to take down a plant for maintenance is largely based on schedules and plant performance.
With a Forward market for electricity, all Participants can see the future prices for electricity. A Generator can minimize their lost revenue by choosing to have their planned maintenance during a month where the price is lower.
Another strategy a Generator could employ is when it has already sold Forward contracts at a good price but now the current price for the month’s contract is lower. The Generator could buy sufficient contracts to cover their short position resulting in a net hedge position of zero for the month. The Generator can schedule its maintenance and receive revenue from the difference between the sale price and the purchase price of the contract.
Unplanned plant interruptions can happen for any number of reasons. The impact of these unplanned events are the same as for planned maintenance except they are — hopefully — for a shorter duration.
Given this shorter duration, the Generator could buy daily or weekly contracts to cover its position. This locks in the financial impact of the unplanned event but means the Generator doesn’t have to unwind his whole position for the month.
The Forward hedging of electricity prices offered by the Green Tiger Markets’ platform can help Electricity Suppliers maximize their returns. The marketplace allows Generators to lock in prices to better manage revenue and minimize the impact of both planned and unplanned maintenance. As time progresses, Generators can dynamically manage their hedge positions based on prevailing market conditions.
Learn more at greentigermarkets.com or email [email protected] to set up a demonstration.