European Commission

1
European Commission

• High level Group on Competitiveness, Energy and
  Environment

Brussels, March 31 2006
Dr. Florian Haslauer
2
Conventional contracting strategies still
dominate due to restricted competition and a lack
of experience with other tools.
Energy sourcing behavior
of companies
Contract strategies
Full supply contracts with fixed duration and
price

• "To avoid risk, minimize process cost"
• Risk of wrong expectations for price development

Fixed price

• To avoid risk, minimize process cost "
• Risk of wrong expectations for price development

Spot-indexed contracts

• "To get the best price"
• Exposure to volatility not necessarily best price

Site-by-site contracts

• "Competitive restrictions"
• Loss of portfolio leverage and benefit

Careful timing of purchases

• "To buy when the price is low"
• A form of speculation

Independent hedging

• "We understand hedging"
• Potential to sup-optimize choice of hedge
  instrument

Gas
Power

• Companies basically rely on conventional
  strategies
• Reasons Limited experience with innovative
  contracting strategies, status of liberalization
  still limits applicability of tools

3
Value levers for energy sourcing such as price
unbundling and demand aggregation will gain
importance.
Energy sourcing behavior
Value levers for energy sourcing
Price unbundling
of companies
Aggregated level negotiation
of companies
0
100
0
100
Commercial conditions
Site-by-site deals
Delivered price
Bundled tender without aggregated load curve
Transportation/distribution
Bundled tender based on an aggregated load curve
Single major supplier
Tariff structure optimization
of companies
Negotiation strategy
of companies
0
100
0
100
Simple rate
Tender process
Day/night rate
Auction process
STOD structure
Prepared multi-round negotiations
Interruptible gas contracts
Other

• Dominance of price unbundling
• Demand aggregation gaining importance
• No interest in multi utility, customers wanting
  several suppliers
• Negotiation strategies dominated by conventional
  instrument of tender processes, auctioning is an
  exception

4
Commodity procurement and risk management are
considered as main sources of savings.
Energy sourcing behavior
Main sources of savings
Commodity Procurement Risk Management
Operational Flexibility
Demand Reduction

• Aggregate commodity
• Integrated risk management

• Curtail Load
• Shave Peaks
• Install/operate generation

• Invest in Efficiency
• Reduce waste

ReducedPrices andRisks
ReducedPrices andCosts
ReducedQuantity
Average scale
Average scale
Average scale
5 very important 1 not important

• Important role of risk management
• High potential of load management underestimated
• Demand reduction potential already leveraged

5
Customers are skeptical about positive
implications of the future market developments,
high sensitivity to possible risks reflects
uncertainty in coping with the liberalized market.
Energy sourcing behavior
What opportunities and risks do you see in the
liberalization of the energy markets in Europe?
Opportunities
Risks
not at all
to a highextend
not at all
to a highextend
1
2
3
4
5
1
2
3
4
5
Higher prices
Lower prices
Reduced security of supply
Higher customer orientation
Higher complexity of buying processes
Improved products
Higher volatility of price

• Contradictory expectations especially regarding
  price
• Low expectations for positive price development
• Risks considered bigger than opportunities,
  reflecting insecurity of companies

6
Price is the predominant buying factor,
credit-worthiness and reliability of the supplier
are indispensable pre-conditions.
Energy sourcing behavior
Buying factors
Mentioned by of companies
Average score(max. 100)1)
Price
Credit rating
Reliability of supply
Service offerings
Service quality
Multi utility
Environment protection
Experiences already madewith a supplier
References
Regional focus

• Price predominant factor, many companies
  unsatisfied with current supplier
• Credit rating and reliability knock-out-criteria
  for many companies
• No advantages for Stadtwerke as local suppliers

(1) Sum gt 100 as credit rating and reliability
considered as 100 condition by many companies
7
Companies are interested in less sophisticated
products like contract bundling on one hand, and
innovative portfolio and risk management tools on
the other hand.
Energy sourcing behavior
Would you be interested in the following
offers/products in the future?
Gas
Electricity
Interruptible gas cover contracts
Full supply
Fixed price
Contract bundling
Load Management
Base load supply
Peak load supply
Forwards/Futures
Options
Construction of branch lines
Options for grid capacity
Maintenance of equipment
Other
8
The product demand shows an increasing
diversification of sourcing tools in general and
portfolio management in particular.
Energy sourcing behavior
Future product demands

• The market is split in customers with low and
  with high sophisticated demands, challenging
  suppliers market know-how and product
  development capabilities.
• Traditional tools like interruptible gas cover
  contracts stay important.
• Companies will bundle supply as soon as
  regulatory framework facilitates this.
• Companies with well developed energy procurement
  increasingly use futures and options for
  portfolio and risk management purposes, their
  product demand getting more complex.
• Some products are already common in the
  electricity market like base and peak load supply
  but are not in the scope of large gas users yet.
• Maintenance support is already outsourced or not
  considered as interesting so that considerable
  cost savings may be neglected.

9
What should industrial energy consumers do, to
optimize energy sourcing in the current situation
?
Outlook Future development

• Companies should centralize or at least
  increasingly coordinate energy sourcing, relying
  on existing lead buyer structures where available
• Increasing use of all possibilities to share
  commercial and technical risks with the supplier,
  especially in Germany
• Integration of energy purchasing with overall
  risk management, i.e. financial hedging
• Motivation of suppliers to offer new products,
  i.e. new price indices for gas beyond oil