by Dave Madden
Energy is a constantly evolving industry with a delicate balance of both regulation and competition in the market. Each day, the United States per capita energy consumption includes 2.6 gallons of oil, 9.7 pounds of coal, and 255 cubic feet of natural gas. Plus, residential daily consumption of electricity is 11.8 kilowatt-hours per person.
Meeting the growing demand for energy in the U.S. requires ongoing, accurate risk assessment and financial planning for municipal and cooperative customers. This is where portfolio management comes in.
What is Portfolio Management?
Portfolio management combines integrated resource planning and procurement with risk assessment and management to ensure that customers have a low-risk, cost-effective, and reliable portfolio of energy resources. Many municipal and cooperative customers need low-risk, efficient energy planning to lock in their annual budget and safeguard from price volatility in the market. However, they often lack resources, such as real-time and day-ahead analytics, to best manage their energy portfolio.
Outsourcing portfolio management is a cost-effective way for municipalities and cooperatives to lock in price certainty and limit exposure to real-time pricing. Using portfolio management principles, energy consultants are able to look at big picture insights, such as long- and short-term resource planning, political or economic factors that could impact energy pricing, and changes in regulations from state to state.
Then, it’s important to consider how the big picture insights impact each customer’s unique energy portfolio in order to make recommendations for their specific needs. No energy portfolio is exactly alike. Each customer has specific capacity and energy requirements. Some have generation while others do not. Regulations and renewable portfolio standards (RPS) vary from one region to the next.
For municipal and cooperative customers, portfolio management offers the ability to confidently mitigate risks by outsourcing to experienced experts who can offer real-time and day-ahead analytics, long-term market insights, and innovative energy solutions.
Potential Risks in an Energy Portfolio
The energy industry is evolving quickly as global energy demands continue to climb, new technologies emerge, and regulations evolve. This uncertainty can expose municipal and cooperative customers to significant risks. It’s important to understand the biggest risks of your energy portfolio and how to diversify your resources, technologies, and contract terms to mitigate those risks.
One of the largest risks of a poorly managed energy portfolio is price volatility, leaving customers exposed to real-time pricing and fluctuations in the market. Power supply congestion, volatile natural gas prices, and uncertain wholesale power prices can make it difficult for municipalities and cooperatives to plan around an annual energy budget.
There is a growing demand to reduce carbon emissions and provide a more diverse mix of renewable energy solutions. Because of this, federal and state regulations are rapidly changing. As political dynamics shift, new or changing regulations can cause significant impacts for customers who aren’t prepared. Renewable portfolio standards (RPS) vary from state to state. It’s vital that customers meet renewable energy regulations, even if they are optional, in order to safeguard against the possibility of stricter restrictions in the future.
Customers who diversify tend to withstand high-impact situations, such as extreme weather events, much better than those who don’t. Unfortunately, if cities wait until two weeks before a significant weather event, it’s simply too late. A low-risk energy portfolio offers diverse resources that can withstand extreme weather or compensate for compromised resources during inclement weather, thus reducing the risk of intermittency for consumers.
Strategies for Building a Low-Risk Energy Portfolio
Several risk mitigation strategies are used in portfolio management to protect customers from price volatility, intermittency, and emerging risks in the market.
Hedging strategies can protect customers from increasing prices by locking in fixed, contractual pricing. A ladder approach, which layers in hedging in staggered intervals of one to three years, protects customers from increasing prices without the additional risk of missing out if prices suddenly drop. For customers with generation, a variety of products are available to mitigate the risks of intermittency or generation’s failure to perform, including unit outage insurance and call options on energy.
One of the most important principles of building a low-risk energy portfolio is diversification. This means more than just diversifying your energy sources. Your energy portfolio should have a diversity of fuels, technologies, renewables, contract terms, and financial instruments for risk management.
At Evergy Energy Partners, we have decades of experience managing energy portfolios. We are able to offer big-picture analysis and recommendations for the complex, constantly changing market. There is not a cookie cutter approach to energy management. We look at your existing portfolio and find cost-effective, innovative energy solutions to meet your specific needs. Learn more about our portfolio management solutions.
- Dave Madden
Dave has been with Evergy Energy Partners for a little over two years as Director of Origination. Dave has spent his career, spanning over 34 years in the energy business, focusing on municipalities, cooperatives, merchant plants, consultants and others interested in hedging energy, capacity and renewable products.