Managing energy risk strategies

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    With increasing volatility in the energy markets during the past year, data centre operators need to consider more than just price, warns Noveus Energy’s Bobby Collinson. Critical facilities need to adopt a clearly defined and dynamic risk strategy. So what are some of the key considerations?

    During the past 12-18 months the volatility in the energy markets has increased considerably and is set to continue. This, coupled with the continual increases and changes to the value and the structure of non-energy charges, means that data centre developers and operators need to consider more than just the price when negotiating an energy contract. 

    In our experience of managing energy for some of the largest data centres, operators and developers, the following are some of the most important considerations when sourcing an energy deal from a supplier:

    Fixed or flexible contract The first decision faced by many is whether to opt for a fixed or flexible price contract. There is no right answer to this question, but with increased volatility and the uncertain nature of load growth in data centres the flexible contract approach mitigates risk of buying at the wrong time and offers the greatest flexibility of increasing load without penalties. 

    The decision on which type of contract to opt for is material in ensuring the optimum energy price is obtained.

    When to buy

    In commodity markets, the general rule of the price being cheaper the closer to delivery does not always hold true for gas and electricity. Having analysed the markets over the past 20 years, there is no real trend or time of the year that is better than any other.

    With that in mind, if you have chosen to buy through a flexible contract the following three disciplines are essential in optimising a risk management strategy: 

    The strategy should be dictated through a combination of budget considerations, market conditions, risk appetite and future tenant requirements and ideally explored and set through a workshop with key stakeholders. Understanding what is most important to you as a business when evaluating a flexible contract is key as only three elements of the contract can be evaluated quantitatively. The remainder of the terms are qualitative and will be bespoke to what is most important to the datacentre. A scoring matrix can help to analyse these elements.

    Forecast load projections as accurately as possible for flexible contracts. Inclusion of a volume reforecasting mechanism in the supply agreement is critical as it will help with managing consumption changes during the lifetime of the contract. When actively managed, volume reforecasting will allow upward adjustments to the contracted consumption when tenant load increases while equally providing flexibility when usage is likely to out turn below expectations.

    Operate dynamically 

    If adopting a flexible contract approach, it is essential that any strategy is dynamic and changes with market conditions rather than being fixed at the outset and remaining in place for the duration of the contract – markets change and so should the strategy.

    Strategies will perform differently in rising, falling or stable market conditions so consideration should be given to the prevailing and expected market environment when selecting the strategy to be employed. 

    Regular strategy reviews are a must in order to assess prevailing market trends, to review the performance and continued appropriateness of the current strategy and to decide on potential strategy adjustments. Supplementary ad-hoc strategy discussions in the event of sudden market price spikes or other exceptional circumstances will also be useful to determine an appropriate response.

    Running a shadow strategy

    When approaching risk management dynamically, it can be a good idea to keep a close eye on how an alternative purchasing strategy is performing. Having permanent visibility of how ‘Plan B’ is shaping up can help inform the case for a potential strategy switch should it be deemed appropriate at any time. 

    There are, of course, other important considerations outside of strategy deployment which if managed correctly will encourage supplier participation and present additional options that may appeal to tenants:

    Credit 

    While credit is not directly part of the risk management strategy it can be a major problem for early stage data centres and will often dictate how data centres can buy energy. Credit, as with price, can be negotiated altogether. It is essential to produce a coherent story around tenants, data centre growth, procurement strategy, debt and financing and to engage with suppliers openly and early in the process.

    Non-energy charges

    Non-energy charges now make up more than 50% of the energy bill and are still treated as though they are non-negotiable and not part of the risk management strategy. This is nonsense and they should be. It is true that if your contract starts on 1 April and is for 12 months duration the scope to negotiate these charges through a full tender is limited, as most charges are published. 

    However, 75% of the market negotiates contracts in October and each supplier forecasts these charges and take different views on them for 12/24/36 month durations. This presents an opportunity to negotiate and fix some or all of these charges regardless of whether opting for a fixed or flexible contract. This should be treated as an active part of the risk management strategy in the same way as commodity price. 

    Renewable Energy 

    Most data centres are keen to buy green/renewable energy. In most cases there should be little or no price premium associated with green energy as suppliers utilise their existing renewables contracts. Some suppliers are also able to provide energy from specific natural generation sources, further enhancing the credentials of their offering and creating additional opportunities for sustainability reporting.

    In addition, it is worthwhile speaking to specialist suppliers in the renewable space where some energy exposure can be hedged directly with producers or through a private wire directly to a renewables provider if there is one nearby.

    A clearly defined and dynamic energy risk management strategy enables mission critical sites to deal with the uncertainties of the energy market price fluctuations with greater confidence and foresight.

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