Clients Volume Tolerances & Reforecasting

Understandably, energy is the last thing on most people’s minds right now, but it is important for businesses to consider. From locking in 10-year lows to managing a reduction in consumption, our expert trading team have put together this handy information guide on what action you can take. Whatever your situation, we are here to offer guidance and support.

LGE hope that everyone is keeping safe and healthy through the current COVID-19 outbreak.

Whilst we are sure that energy consumption is not your top priority at present, it is an area that will need to be considered for the following reasons:

  1. If your organisation is one of the few which is not witnessing a fall in your energy consumption and you have volumes to purchase, with markets being at +10 year lows, now might be the time to lock in more volume. No one is able to predict where energy prices may go, especially during the uncertain times we are experiencing however, what we are able to say with confidence is that they are significantly below prices recently seen for the same periods. Therefore, if you have a degree of certainty in your future consumption volumes, now might be the time to secure part of that volume. It might also be the time to consider extending your current contract durations, as the current low cost of energy being witnessed in the prompt end of the wholesale market has rippled out to the further dated periods.

2.  If your organisation is one which is currently reducing its consumption volumes, you will also need to take action.

  • Supply contracts fall into two main categories: Take or Pay or Tolerance product. Take or Pay also known as ‘cash-out’ means any volumes consumed above or below the forecast consumption volume, will be bought or sold back at the prevailing market rate on a day by day basis. With a tolerance product as long as the actual consumption is kept within the tolerance band then there will not be any buys or sell backs to the market on a day by day basis. In both cases it is important to ensure that your forecasted consumption volumes are as accurate as possible.  In most (if not all supply contracts), there is a clause which states that if you as the off-taker become aware of any reason for a significant change in your consumption volumes either up or down, you must make your supplier aware within a reasonable period of time. Usually a time frame is stipulated.

In the current climate, it is likely that you will be forecasting a reduction in volumes and we at LGE will help with these reforecasts and in notifying the supplier of changes, whilst also attempting to minimise the financial impact of such reforecasts. If you reduce consumption and do not submit a reforecast, then your supplier usually retains the option to undertake a reforecast on your behalf based upon the consumption patterns they are witnessing. LGE would suggest that it is in your interest to make these decisions as no one knows your business better than you.

  • As part of a prudent risk management approach to purchasing your energy, it is likely that you will have already bought volume for the current period. Depending on where your level of purchase is versus your revised levels of consumption, you may find yourself needing to sell back previously purchased volumes. Subject to when these purchases were made, it is likely that the cost of that energy is above the current market price and therefore you will be selling back at a loss. This will have a negative impact on your energy prices and you will see an increase in the cost per unit of energy purchased, due in part to the cost of the sell-back and compounded by the reduction in the volume over which the cost is spread. A worked example is shown below:
    • Product April 2020 Baseload.
    • Previously Hedged 1MW @ £40.00 per MW
    • Cost would be (1MW x 24Hrs x 30 days x £40.00) = £28,800.00
    • If usage is reduced to 50% this would result in a sell back of 0.5MW
    • The current market price is £20.00 per MW (So a loss on the sell back of £20.00 per MW)
    • The cost would be Hedged cost (0.5MW x 24Hrs x 30days x £40.00) + Cost of sell Back (0.5MW x 24Hrs x 30days x £20.00) = £21,600.00
    • However, the cost per MW has risen from £40.00 per MW to £60.00 per MW

If you have any questions or concerns in regards to your energy usage and reforecasting of volumes, then please ask your LGE Account Manager.