Navigating wholesale energy markets: utilities' profit-at-risk

All figures correct at time of writing.

The context

Utilities, or electricity suppliers, provide their customers with electricity based on scheduled transactions, for example, 5MW every half hour. However, once a deal is structured and hedged, a certain amount of power required will always remain open - as utilities need to buy or sell power in order to match their customer’s consumption profiles in real-time.

As a result, most utilities are faced with some risk from even their standard business. Below, we have tracked this measure (profit-at-risk) across recent years for 3 different segments of utilities’ typical customers using Monte Carlo simulations.

The analysis

For the past 3 years, we have tracked the risk from hedging inefficiencies as a result of utilities’ buying and selling residual power in the spot market – which we have defined as “profit at risk” (PaR).

This risk is shown for 3 standard profiles and expressed in €/MWh for easy comparability.

The standard profiles rated below are from 2019 to April 2022. The simulation models were recalibrated monthly to reflect the current market situation and the expected structure was recorded using hourly forward curves (HPFCs).

The easiest way to identify the PaR is to select a quantile. In our study, we chose the 5% quantile – which shows how many €/MWh a utility could lose with a probability of at least 5%.

Typical supply profiles for commercial/industrial production (G1), households (H0) and agriculture (L0) were analyzed. The data shows that the risks from scheduled transactions has increased at least fourfold for contracts delivering in 2023 and fivefold for contracts delivering in 2024. This significant increase in the level of PaR is caused by the strong increase in the relative volatility (see figure 4).

From these figures we can see how commercial/industrial production presents the highest PaR from the three sectors we have chosen to focus on (Between €0,8 and €4/MWh) whereas households have a lower amount of PaR (between €0,2 and €1/MWh) - likely due to fairly standardised consumption profiles. So whilst all energy suppliers must remain cognisant of how much money they could be losing in spot markets, those with with larger non-domestic supply portfolios may have a more difficult time in managing this risk in the time to come.

The conclusions

As energy prices and market volatility have increased, then naturally, so has the level of PaR for suppliers trading in spot markets. With Cal 2023 contracts seeing a 400% increase in PaR and a 500% increase in PaR for Cal 2024 in this case study, suppliers need to manage this risk as effectively as possible to ensure that long-term energy purchasing strategies are not undone by short-term market moves.