Risk Management Strategies
Managing Your Risk and Guiding Your Strategy
Government Procurement Service offers a broad range of risk strategies from which you can choose, depending on your organisation’s need for budget certainty and appetite for risk. We can implement these for up to three years ahead, with different supply periods: from 1 April to 31 March and/or from 1 October to 30 September each year.
If your existing contract dates do not tally with these delivery periods we can establish an interim price to bridge the gap.
In each of these supply periods, there are two pricing options.
Locked strategies
We procure your energy requirements as part of a larger portfolio of ‘like-minded’ customers. The achieved price is calculated from the multiple purchases made and you receive a locked price for the supply period.
This is often referred to as a ‘flexible locked strategy’. The price of energy is known before the supply period starts and will remain static throughout the year, even if energy prices rise significantly. This is useful for budget certainty.
This approach also benefits from the ability to be able to make multiple purchases thus giving the ability to avoid a single purchase decision at a time when wholesale prices are high.
However, if prices fall after the energy has been purchased and the price set, customers still pay the price that was fixed at the start of the supply period, and will not benefit from the fall.
Variable strategies
Buying flexibly both before and during the supply period allows energy to be bought in the 'prompt' (closer to the period of use) markets and takes advantage of any price falls. There are always safeguards in place to ensure we also have the option to lock-in should prices rise.
Choosing this option means you will still be on a fixed billing rate from the start of the supply period, but this will only be a reference price and you will receive a reconciliation payment, hopefully always a credit, at points during the period.
This is often referred to as a ‘flexible variable strategy’. It means energy is purchased over a longer period, enabling optimised purchasing. It allows access to short term markets, potentially reducing any forward market premium that might be imposed by buying ahead. It also offers an opportunity to benefit from any price falls that occur during the supply period.
On the other hand, the final cost of energy will not be known at the start of the year and the final price paid could be higher than the reference price.
Your decision
It can be difficult to decide the appropriate strategy for your organisation, so it is important we discuss your risk options. We have the experience and expertise to guide you.
Bear in mind that energy prices can go up as well as down and, whichever strategy you choose, there is a possibility that the end result may be a higher price than would have been the case in a traditional fixed price contract.
However, Government Procurement Service can mitigate this risk by setting a ceiling for the maximum price at which to buy energy for the basket overall. We can also selectively ‘unfix’ prices, if purchases were made at a time of high prices which then fall steadily over a reasonable period. This energy can then be re-purchased at a lower price.
The considerable process cost savings achieved by purchasing through an existing framework agreement should also be taken into account.
Longer term purchasing
Thanks to the market-leading structure and specification of our frameworks, Government Procurement Service is able to de-couple the forward purchasing of energy from the delivery (and billing) through the nominated framework supplier.
Obligations on any new supplier to accept energy purchased in advance of their supply period mean that forward purchases can be made outside the present framework periods but the benefit is carried forward to any new framework. This means that Government Procurement Service can offer longer term purchasing and risk management without the constraints of fixed contract periods.
In times of lower energy prices, it may be appropriate to purchase some energy forward for up to three years, provided there is an actively traded market. This gives Government Procurement Service the opportunity to smooth out some of the year-to-year volatility in energy prices.
There are always some elements of the energy (peak and residual electricity and gas outside flat seasonal usage) which cannot be purchased until closer to the supply period so it is unlikely that Government Procurement Service will simply 'lock-out' prices for three years.
However, using the ability to un-fix there will always be an opportunity to return to the market should prices for forward periods fall and the prices on energy secured look unattractive.