Marcel Boonaert – head of trading at leading natural gas supplier, WINGAS UK and helped to develop the flexible price contract – explains how large energy users can trade to lower their bills.
Flexible procurement can appear daunting when it’s easier to sign a gas contract and forget about it until it’s up for renewal. Procurement or energy managers have a myriad of other responsibilities, from spare parts to stationery.
But working with experts can deliver considerable savings.
Gas – buying or selling?
The wholesale gas market is a virtual platform where buyers and sellers come to trade. It connects upstream sources – ‘supply’ – with downstream end users – ‘demand’.
Gas is a tradable commodity. Traders play a big part in the market, doing deals on gas numerous times before it reaches the end user. In the UK, we have a simplified single market location where trading can take place, the National Balancing Point (NBP).
The NBP trading point allows the price to be the same regardless of where the gas has entered the UK supply system – be it the terminal at St Fergus in Scotland, or Bacton in Norfolk.
On the NBP, gas contracts can be bought for tomorrow, next week, or for several months and years in advance, each of which may have different drivers affecting the price.
Within the UK wholesale market place, traders will buy and sell contracts for different delivery dates – from spot, delivered today, to four or five years ahead. The contracts they choose to trade depend on whether they think the price is over or undervalued, a judgement which is informed by countless factors.
The world is getting smaller
Gas is a truly international commodity traded in a global market place. Produced in nearly 100 countries and used across the globe, it has become invaluable to the world economy and everyday life.
Although there is only one set of price levels at any one time in any given national market, like the NBP, other trading hubs around the world have different prices for different supply periods and these are affected by a seemingly infinite number of variables.
Long-term trends are widely reported. The recent drop in the price of Brent crude because of a glut in supplies, for example, is making front page headlines around the world. As an energy source, gas is certainly closely connected to the price of oil, so this has had a big impact in our markets too.
However, unless you are immersed in the detail, it is easy to miss the other day-to-day events taking place in every corner of the world which affect the price of the gas you use to fuel your business.
On the demand-side, a cooler than expected summer in Japan would mean less generation requirement for air conditioning which in turn means less gas being shipped to one of their 33 Liquefied Natural Gas (LNG) terminals.
Or if employment in the US is perceived as improving this would signal that one of the top manufacturing countries in the world is growing which is always a positive signal for prices to get stronger.
On the supply-side, if an Australian LNG infrastructure project gets shelved, it would indicate that all markets reliant on global LNG deliveries would be fighting for less supply and the UK may therefore have to pay a higher price to attract LNG to our shores.
Speculate to accumulate
When the market became more open a decade ago I could see the opportunity for large energy users to benefit, in the same way that financial services companies and their clients do by trading stocks and shares.
The flexible contract was born out of the willingness of some clients to take on the risk of market fluctuations in return for access to live pricing. In a way, we were empowering customers to manage their own destiny.
Customers on flexible price contracts have the option to buy and sell gas when they choose. This may sound daunting at first – we know procurement managers are busy enough without having to keep track of prices that can fluctuate every minute.
However, the flexible price contract has real advantages and a good trading team will follow the market for you.
Knowledge is power
It’s also about knowing your customer personally, a good supplier will develop a deep understanding of their clients’ businesses and gas requirements.
This allows the traders to flag potential opportunities to customers and discuss the pros and cons of buying or selling at a specific time; even executing trades, there and then, on behalf of customers within agreed parameters.
Traders also provide access to a complex market place which is not easy to navigate on your own.
Proactivity really makes a difference. I know that if I contact one of my customers at the right moment, I can save them thousands of pounds and bring down their energy costs.
The flexible price contract is becoming increasingly attractive, particularly as prices have dropped. Many energy managers are realising that with the right support, they can reap the benefits of price fluctuations.