ENERGY MANAGEMENT
understandably, a key consideration here. However, rather than sim-
Marley Sets a Ceiling on Energy Prices
ply buying only forwards or physically settled futures, organisations
Marley Eternit is the UK’s leading provider of roofing and
cladding solutions to the construction industry. Each of Marley’s
can use structured financial products to manage price risk. Using
seven sites is an energy-intensive organisation, and energy
derivatives opens up the markets in ways that physical trades cannot.
accounts for £8 million in a total annual budget of £60 million.
With a far greater number of market participants, the choice of
The real energy-hungry operation is its clay manufacturing and counterparty and price is greatly expanded. With a vast number of
processing plant in Keele, where energy accounts for 40 – 50%
products available, these different tools and techniques offer a
of input costs.
degree of flexibility and choice that far exceeds those offered by
Marley was particularly sensitive to market volatility and,
physical supply contracts. And although the issue of credit will never
against a background of steeply rising prices, decided to re-
completely disappear, banks and other financial institutions will give
assess the way that it purchased energy and minimise its
exposure to energy price risk.
credit lines, albeit at a premium, that suppliers simply wouldn’t
Marley decided to take an approach to energy purchasing that
touch. Again, this opens up more choice and greater competitive-
had a greater focus on managing risk. The company worked with
ness for long-term supply.
Utilyx to establish a series of risk management policies and The use of financial products compounds the demand for water-
procedures, to ensure that energy purchasing was in line with tight risk management policies. Skills and capabilities that have not
Marley’s operational risk strategy. An Open Book was set up that
traditionally been found in the energy department are required. Lack
enabled Marley to buy commodities from the cheapest vendor
of transparency and liquidity within the gas and power options mar-
on the wholesale market at any given point.
kets places an increased demand for market knowledge, trading abil-
Since adopting its flexible purchasing strategy, and taking a
risk management approach to energy procurement, Marley
ity and, of course, direct access to wholesale markets.
has bought its gas supply at, or close to, optimum prices. In the
first six months of the contract the company anticipates
The Green Advance
making an annual saving approaching £900,000 on its gas
A flexible approach to buying also opens up the opportunity to inves-
supply – in addition to the savings made by falling prices in the tigate ‘green’ sources of supply, and to incorporate these into the
wholesale markets.
energy mix. The focus on climate change and the perceived sharehold-
The new energy strategy has made a huge contribution to the
er value in adopting more environmentally sound policies is driving
business and has moved energy and utilities firmly up the
organisation to look for ways of reducing their emissions. This partly
company’s agenda. As a result, the whole company – most
resurrects some of the ‘old-school’ energy department skills of
notably the Keele plant – is much more profitable.
reducing consumption and increasing efficiency. But it also requires
what are – and are not – acceptable organisations to seek out greener sources of fuel – without paying a
actions for those managing the risk. The premium for the privilege.
process of formulating these rules is Current environmental concerns also have an impact on the wider
therefore of critical importance. As such, markets themselves. Carbon has a significant impact on the price of
energy buying is no longer a ‘one man power and organisations need to be aware of the role that it plays in
job’ and the levels of scrutiny applied their energy supply.
are significantly greater.
Structured financial instruments are increasingly
Enter The Financial Instruments
Structured financial instruments are
making an appearance within the energy portfolio
increasingly making an appearance
within the energy portfolio. Despite the The Upcoming Transformation
success of physical hedges and the sig- Many of these changes are still in fairly nascent sages. While flexi-
nificant savings they can offer, there ble contracting is increasing becoming popular, many firms are still
are limitations to even the most sophis- opting for a straightforward tender. What’s more, the firms that are
ticated flexible deal. They are funda- adopting financial structures to help hedge their exposure really are
mentally still a physical supply contract in the early pioneer stage, as are those investing directly in renew-
that restrict buyers to managing the able plant.
flexibility of their contract with their These developments are transforming the way industrial and com-
incumbent supplier, giving them only mercial organisations view their consumption, sources and acquisi-
one possible counterparty when they tion of these essential commodities. While the change is far from
wish to trade. complete, there is little doubt that flexible buying, accompanied by
Traders are limited to buying and sell- stringent risk management procedures and alternative sourcing
ing just the products that are embed- strategies are set to become ‘business as usual’ for the majority,
ded within the contract – physical power greatly expanding the number of direct participants in energy and
or gas – and do not have access to the commodity markets
•
full range of opportunities available
within the wholesale markets. What’s
Chris Bowden is CEO at Utilyx; the UK’s leading provider of energy price
more, there are restrictions on how
and consumption risk management services.
much and how far forward they can buy.
www.utilyx.com
The credit-worthiness of the buyer is,
78 SEPTEMBER 2007 COMMODITIES NOW
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