Natural Gas Prices Spike. Here are 2 Strategies for Managing Price Risk3 min read
The recent spike in natural gas and electricity prices have caused many energy consumers to stop and wonder what, if anything, they can do to protect their budgets against future price volatility. The good news is that if you’re a business or government energy consumer, you have multiple options for managing price risk depending on how involved you want to be. Although options exist for both electricity and natural gas supply, this article will focus on physical natural gas supply options for price risk management.
A hands-off approach to price risk management
For those of you who want a more ‘hands-off’ approach, you should look into a ‘supplier-managed’ procurement program. Let’s be honest, most of us are not energy market experts. Even if we understand the fundamentals of energy supply and demand and how they affect energy cost, we don’t have time to watch and analyze the energy markets all day, much less every day. The problem is that energy markets can start to move at any time and react to any number of market influencers. For customers that choose to enroll in a supplier-managed program, a team of energy market experts watch the energy markets and manage a pool of customers’ physical natural gas purchases. This managed pool-approach mitigates the impact of volatile market movement and also takes advantage of market drops so customers can achieve a managed budget.
A systematic approach based on data & staged purchasing
Another option for managing physical natural gas price risk during volatile energy markets is to employ a systematic approach. Using algorithms that incorporate mathematical price targets and overlays, a systematic program can also give you a ‘managed’ energy purchasing plan based on data -not emotions and guesswork. By purchasing on a schedule, a systematic approach can mitigate the budgetary effects of spiking energy prices and has proven to be a smart alternative to pure ‘spot’ strategies during volatile markets. And, for those of you who want to mitigate price risk AND take advantage of market prices, you can employ a systematic approach for a portion of your usage and keep the remaining portion of your energy demand on a spot or market-based pool price. A sample strategy would be to enroll 50% in a program like Constellation’s systematic Minimize Volatile Pricing (MVP) program and 50% in Constellation’s Pool Price. The combination can give you a solid blend of risk management and the 50% Pool Pricing gives you the flexibility to lock in additional gas to meet any potential budget or risk management needs.
NATURAL GAS PRICE RISK MANAGEMENT SOLUTIONS
Managed Procurement Program: The Hands Off-Solution
The Managed Procurement Program (the Program) is designed to reduce price volatility associated with purchasing physical natural gas in a volatile and unpredictable market, which is especially useful if you have a limited ability to monitor market prices. Constellation’s market experts use a diversified mix of weighted pricing alternatives and risk management tools to determine the program price that includes fixed-price purchases, cap-price solutions and monthly and daily indexes. By selecting blended pricing alternatives the program limits high-price exposure while maximizing low-price potential. Download Managed Procurement Program product sheet
Minimize Volatile Pricing (MVP): A Systematic Approach
The MVP program allows customers to take advantage of a proven systematic price-locking program that attempts to reduce physical natural gas price volatility through staged purchases. Take emotion out of your purchasing decisions and flatten out price spikes to control your energy spending. A series of mathematical price targets and overlays is used to determine the timing of locking in purchases. The program can be used in conjunction with various price-locking and/or spot market strategies to create a diversified energy procurement plan. Download MVP product sheet
To request more information on natural gas supply options click here
Published: February 21, 2014
- Natural Gas