THE MANAGEMENT OF RISK IN ENERGY PROCUREMENT 20 th May 2015 The - - PowerPoint PPT Presentation

THE MANAGEMENT OF RISK IN ENERGY PROCUREMENT

20th May 2015

THE ENERGY AGENDA

Gas & Power

Procurement

Resource Management

Service

Overview of Total UK Energy Market Fixed & Flexible Contracts Risk Management Energy Management Summary

The Energy Agenda

TOTAL AS AN ENERGY PARTNER

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“CIPS have partnered with Total to provide information and resources to educate and support businesses make effective energy supply

• decisions. CIPS recognises Total as a leading supplier of power and gas to

UK business. Total is committed to ensuring transparency across the industry it

• perates.

The partnership with Total forms part of CIPS knowledge strategy which is structured to deliver information, guidance and resources to support CIPS

• members. CIPS undertakes a careful review of all potential partners to ensure

that they meet the high standards and values CIPS expects as a professional body representing the procurement and supply chain profession.”

• David Noble, CEO - CIPS

• Fifth largest publicly traded international energy company
• 100,000 employees operating in more than 130 countries
• Exploration and production operations in more than 40 countries
• Largest Industrial & Commercial Gas Supplier in the UK c . 50TWh (equivalent to the

gas use of more than 3.7 million domestic households*)

• Fast growing power supplier with >6TWh I&C portfolio (equivalent to the electricity

use of more than 1.8 million domestic households*)

• Full energy spectrum focussed entirely on the Industrial and Commercial market

(business users)

• 500 MW+ of low carbon & renewable generation under contract
• Innovative e.g. First ‘Green Gas’ supplier in the UK – Green Gas Trading (GGT)

* Based on the annual domestic average consumption for 2014 - 13,500 KWh (gas) and 3,200 KWh (power).

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Marketing Division Total Gas & Power Total Energie Gaz TEGAZ Total Energie Gas TEG Total Gas & Power Belgium Total Gas & Power Netherlands CDF Energie CDFE

Coal Gas Power

Cepsa Gas Commercializadora 35% Total 35% CEPSA 30% Sonatrach New Ventures

Entity Deliveries in 2014

Portfolio as of January 1st 2015

Contracted AQ Number

• f sites

Market share TGP UK 40.4 TWh 5.3 TWh 41.9 TWh 6.3 TWh 88,351 36,850 18% 3% Total Energie Gaz 25.1 TWh 22.2 TWh 20,431 7% Total Energie Gas 7.8 TWh 13.7 TWh 3,753 3% TGP Belgium 0.1 TWh 0.6 TWh 1,708 <1% TGP Nederland 0.8 TWh 2.2 TWh 615 <1% Cepsa Gas Comercializadora 27.8 TWh 21.8 TWh 261 10% CDFE 0.7 Mt 0.7 Mt 65 37%

MARKETING ACTIVITIES IN EUROPE

THE ENERGY AGENDA

Gas & Power

Procurement

Resource Management

Service

Overview of Total UK Energy Market Fixed & Flexible Contracts Risk Management Energy Management Summary

The Energy Agenda

UK GAS DRIVERS

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• A surprise (further) cut in production at the Dutch Groningen gas field lead to a

jump in prompt prices. A 7% cut for 2015 production compared to 2014 had already been announced by the Dutch government. However concerns over seismic activity caused by gas extraction at the field led to further restrictions being put in place until July – reducing supply by approximately 45mcm/d in February.

• A lack of gas deal between Russia & Ukraine beyond March 2015 remains a
• concern. Relations between the two countries have weakened considerably, and as

such the situation is fragile. A truce between Ukraine and rebels in the east of the country doesn’t appear to be holding too well, and some gas infrastructure has been damaged. Most of the capacity for gas to flow from Russia to Europe goes via Ukraine.

• Longer term gas prices have been pulled down by soft global oil prices and by a

weak Euro against Sterling. Oil prices have moved to the $60/bbl range up from the lows of $45/bbl in January as concerns over declining rig numbers in the US, and Middle East tensions support prices. Political woes in Greece over debt repayments have pushed the Euro to 7 year lows against Sterling, weakening prices due to the levels of trading between the UK and the continent.

Short Term

Medium Term

Long term

Energy Market Overview

5 10 15 20 25 30 35 40 45 GW

2014 Daily Generation

Coal CCGT Nuclear IC France Wind Hydro IC Netherlands Other Coal, 4,025,765 CCGT, 3,611,684 Nuclear, 2,489,184 IC France, 629,058 Wind, 880,517 Hydro, 163,453 OCGT, 264 IC Netherlands, 326,712 Other, 311,226

2014 UK Electricity Generation

2014 Electricity Generation Mix

20 30 40 50 60 70 80 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 Mar 14 Jul 14 Nov 14 Mar 15 Power, £ / MWh Gas, pence / therm

Deepwater Horizon

• incident. US

impose 6 month ban, oil hits $70 National Grid warn

• n winter

gas flow Eurozone financial Crisis starts Start of coldest winter since 1910 Middle East tension, Oil above $120. + Japanese earthquake and tsunami Greek Financial concerns Double recession warning Iran threatens to block Suez canal DA markets spike on cold weather and supply constraints Continued mild conditions and plenty of gas in store pushes down prices during the year. Oil price slumps Low storage levels requires full gas injection in summer months Ukraine conflict begins Crimea Crisis Cut in supply from largest gas field in Western Europe

Commodity Annual Price Volatility

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Market Risk & Policy

Questions to consider.....

• What process do you follow to mitigate price risk with respect to energy procurement?
• Who owns the decision – Is it part of your corporate governance?
• CEO/ MD/ FD?
• Energy Manager/ Procurement Manager?
• Sales Ledger Manager/ Production Manger?
• Third Party?
• Which elements are considered for your procurement decisions:
• Time horizon?
• Forward production/sales forecasts/ expansion/contraction?
• Geo-political change?
• Budgets - now and future?
• Energy is a major cost – can it also be a profit centre or competitor differentiator?
• Accuracy of purchase reduces costs – Importance of forecasts?

THE ENERGY AGENDA

Gas & Power

Procurement

Resource Management

Service

Overview of Total UK Energy Market Fixed & Flexible Contracts Risk Management Energy Management Summary

The Energy Agenda

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Choosing the right product - What are my options? Fixed Price or Flexible? Fixed Price:

• Budget certainty
• You might purchase at the bottom of the market!
• 1/365 chance
• No Capital at Risk (CaR)
• With flexible contracts you need a CaR just in case from day 1 the price rises,

this is typically 5% to 7%.

Fixed Price Contracts

Price Manager Never pay more SmartFix Complete peace of mind Eco-Energy 100% renewable For more information, visit the new website pages on www.totalgp.com where you can also view the new TGP videos!

We’re Open for Businesses

Types of Fixed Price Products

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What are the Benefits?

• Opportunity to make real savings compared to ‘Fixed Price’ contracts
• Transparency of all contract charges
• Buyer controls timing of purchases but is supported by supplier or TPI
• Eggs in separate baskets, avoiding 1 day in 365, or 1,095 for a typical 36m contract!
• Longer term budgeting and horizon (>12 months, evergreen?)
• Enhances control (exposure) and avoids “price steps” between contracts
• Can operate as a fixed price contract
• Buy like major supermarkets and other large companies!

What else do you need to consider?

• Price may only rise from decision day
• Capital at Risk needs to be added to budget

Flexible Contract Options

THE ENERGY AGENDA

Gas & Power

Procurement

Resource Management

Service

Overview of Total UK Energy Market Fixed & Flexible Contracts Risk Management Energy Management Summary

The Energy Agenda

How can my supplier help me manage my risk?

Offering Risk Managed Products

• Requiring an element of flexible procurement
• Strategies
• Alerts
• Triggers
• Position Reports
• Market Reports

Types of Risk Management

Progressive Strategy

• Prompt

– (0 – 6 months; 100% - 75% of total

volume)

• Short term hedge

– (6 months; 75% - 50% of total volume)

• Medium term hedge

– (12 months; 50% - 33% of total volume)

• Long term hedge

– (24/36 months; 33% - 15% of total

volume)

Example of Progressive Volume Hedging

100% 100 - 75% of Total Consumption 75% 75 - 50% of Total Consumption 50% 50 - 33% of Total Consumption 33% 33 - 15% of Total Consumption 15% 3 - 0 Months 6 - 3 Months 12 - 6 Months 24/36 - 12 Months

PROGRESSIVE STRATEGY

Cap and Benefit

• Establish initial stop cap and floor
• If market breaches floor reduce cap and floor, thus reducing market exposure
• Continue until point of delivery
• Back dating analysis over 9 years shows average annualised savings:
• ~5% against the average, and
• ~7% against the opening

The Cap & Benefit Strategy

CAP AND BENEFIT EXAMPLE

19 £130,000 saving since starting the strategy. £178,000 saving against the Strategy Limit.

Lock-in volume = 36,000 th/d

Cap and Benefit Example

TRIGGERS AND ALERTS

• Automated system that allows you to place orders directly with the

procurement desk

• Can be as either a firm “deal” or as a notification service
• Response provided by either email, telephone or both at your preference
• Gas or Power contracts
• Actively scans the 4 major brokers + ICE
• Added value service at no additional cost

Firm Triggers and Alerts

Cap & Benefit

Progressive

TRIGGERS AND ALERTS

• Different strategies are relevant depending on risk appetite

Strategy Appetite

Opportunity to reduce commodity cost Low Firm Triggers Alerts Fixed Price No Strategy High Budget Certainty Low High

Market Information

• Daily prices reports available

everyday, plus archive

• Position Reports
• Other : e.g Transmission Cost

reduction support – TRIAD warning alerts

Relevant Market Reports

THE ENERGY AGENDA

Gas & Power

Procurement

Resource Management

Service

Overview of Total UK Energy Market Fixed & Flexible Contracts Risk Management Energy Management Summary

The Energy Agenda

‘Delivered prices are important but don't forget Energy Management’

What are my options?

• Automated Meter Reading Meters (AMR)
• Savings Programmes
• Capital Investment
• ESOS
• Energy Audits

Energy Management

AMR – Rate and Cost Reports

Minimum energy saving guarantee to protect investment Structured 3-year energy and carbon reduction programme for large energy users Designed around

• rganisations’
• bjectives

Savings range from 4% to 15%

• f annual energy

consumption “Save-as-you- survey” approach delivers rapid results Available at no upfront cost via a “share of savings” arrangement Identifies an

• rganisations’

maximum energy saving potential

Guaranteed Savings Plan

All large UK businesses will be affected by the Energy Savings Opportunity Scheme (ESOS) regulations. The ESOS Regulations 2014 bring into force Article 8 of the EU Energy Efficiency Directive and mandate that all large businesses in the UK undertake comprehensive assessments of energy use and energy efficiency opportunities at least once every four years. The deadline for the first compliance period is 5 December 2015 A large undertaking is one that employs at least 250 people or has an annual turnover in excess of €50 million and a balance sheet in excess of €43 million

ESOS

THE ENERGY AGENDA

Gas & Power

Procurement

Resource Management

Service

Overview of Total UK Energy Market Fixed & Flexible Contracts Risk Management Energy Management Summary

The Energy Agenda

• Expertise in multi-site customers
• Trading Products
• Trading Expertise
• Product Innovation – Green Gas
• Service Level Agreements
• Long term partnership mentality
• Transparency and integrity

www.cips.org/totalgp

Why Total?

QUESTIONS

Questions

No representation or warranty is given as to the accuracy of the information provided in this presentation, which is not intended to provide either general or specific advice or recommendations, and buyers will be responsible for their own operational decisions.

• Expertise in multi-site customers
• Gas Portfolio Optimisation
• Trading Products
• Trading Expertise
• Product Innovation – Green Gas
• Service Level Agreements
• Long term partnership mentality
• Transparency and integrity

www.cips.org/totalgp

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