The energy industry is in a state of emergency: historically high electricity prices, contracts are being cancelled and new customers are only being offered energy at very high prices. one explains what EHA's procurement strategy looks like and why it is now paying off.
As REWE Group's central energy service provider, EHA's procurement strategy ensures that unchecked price increases are avoided. one explains how this works at EHA and why electricity prices are so volatile.
In order to enable a price below the market average, a dynamic approach to electricity procurement is important. This refers to a combination of short-term and long-term electricity procurement, with the aim of continuing to avoid unchecked increases in electricity prices. This splits the procurement risk and allows a large proportion to be price-hedged while still benefiting from current spot prices.
To achieve this, EHA offers various models for individual energy procurement, which take into account risk suitability and the business model as well as fundamental energy supply issues. The development of electricity prices is continuously analysed. To this end, the traders have access to all major energy trading centres, constantly monitor current market developments and compare prices on the exchange with offers from energy traders in order to always be able to act quickly and procure electricity as cost-effectively as possible. Power purchase agreements - or PPAs for short - based on new solar or wind parks are another way of minimising the electricity price risk. In addition to the procurement methods already mentioned, these can hedge part of the electricity procurement. Companies also know exactly which sustainable and regional sources their electricity comes from.
What are Power Purchase Agreements?
PPAs are electricity contracts between electricity producers and electricity consumers or electricity traders that can be concluded at fixed prices. As a long-term variant, they are mainly linked to energy generation from wind or solar parks . Operators of plants with high investment costs but low operating costs can use these contracts to secure payment for their electricity. In addition, the expansion of renewable energies is promoted and the carbon footprint in the electricity sector is reduced. This gives companies with high electricity consumption the opportunity to partially hedge against long-term price increases.
How does electricity procurement work?
As a rule, electricity in Germany is procured via the wholesale market. A distinction is made between two types of procurement: short-term and long-term electricity procurement. The quantity of electricity, the procurement period and the time of procurement can also be determined independently of each other for the procurement strategies.
Short-term electricity procurement
With short-term electricity procurement, the electricity purchase price is close to the current market price. This is because short-term or spot market procurement means that the electricity is only purchased shortly before delivery. What are the advantages of this?
- When electricity is procured at short notice, it is possible to forecast electricity demand more accurately.
- In addition, better prices are sometimes possible at short notice.
On the other hand, greater fluctuations have to be accepted and a forward-looking and reliable price calculation and planning is not possible. Relevant prices can only be specified in the short term.
Long-term electricity procurement
With long-term electricity procurement, the price can deviate positively or negatively from the current market price. This is because the required quantities of electricity are purchased years in advance in several instalments. What are the advantages of this?
- Early and split purchasing minimises the risk and therefore avoids a high price level.
- Greater budget security can be guaranteed within the contract term.
- Price fluctuations on the wholesale market have a less risky impact on electricity procurement.
The periods in which electricity is procured depend on the contractual agreements. Long-term electricity procurement also ensures longer-term planning security, which is particularly interesting for end consumers who are less dependent on energy costs.
What are the current challenges in electricity procurement?
The challenge in procuring electricity always lies in finding the optimum time to buy at the lowest possible cost. This is a great advantage for energy-intensive companies and industries, as small price changes in large consumption volumes have an immediate impact on costs. This is particularly true at the moment, as electricity prices are jumping from one all-time high to the next. By procuring electricity at the optimum or most cost-effective time, it is possible to benefit from the volatility of the electricity price.
Risk hedging instead of electricity hopping
In order to safeguard profits and livelihoods, it is more important than ever not to switch from one electricity provider to the next or to rely on short-term electricity procurement. Instead of electricity hopping, a sensible strategy is to develop innovative hedging mechanisms and actively manage risk.
In the fourth quarter of 2021, energy prices for the 2022 supply year rose significantly to up to 20 ct/kWh, plus grid fees and levies. Companies from energy-intensive sectors are particularly hard hit by this. The winners of this crisis are clearly those who have planned for the long term and fixed electricity prices in recent years through structured energy procurement.
EHA Energie-Handels-Gesellschaft, based in Hamburg, is the central energy service provider for the REWE Group.
EHA also works for many other corporate groups in Germany and Austria. EHA achieves individual added value for its customers through the supply of green electricity and gas, efficiency and climate protection consulting, as well as metering point operation and energy data management.
The company uses digital technologies to achieve lasting reductions in consumption and costs. EHA is strongly committed to climate protection and generates renewable energy itself with its own photovoltaic systems. On behalf of its customers, it concludes Power Purchase Agreements (PPAs) to secure the long-term supply of green electricity.