Finding power to supply its customers is the first thing a newly established utility company needs to do. Electricity can be purchased either from the network or from an energy producer directly. The electricity price from the network is volatile, but the supply is guaranteed. In contrast, the advantage of signing up an energy producer is that the price is normally fixed for a certain period, however surplus and shortage are bound to happen, which need to be considered carefully.
Hedging can be applied to reduce the risk of domestic customers switching, it can also be used to hedge against the risk of market volatility. Since the majority of the power purchased is to cover the contract periods (1 or 2 years), hedging is only needed when additional power is required. Once a portfolio is set up, hedging will be less important as most of the demand is covered by the producer portfolio and only a small percent of the energy will need to be hedged.
In order to define the portfolio, we introduce a business growth model that can enable the supply to be bought earlier (and potentially cheaper) as well as offset the necessary hedging. When the demand forecast becomes available, a decision needs to be made on how much and when to buy. The purchase decision is also depend on energy price. Volatility in the market mainly affects purchases in the short term, as the majority of power is purchased to cover the contract periods (1 or 2 years) there should be less volatility in these longer term prices. The growth forecast and hedging will be built into the decision support system.
Having worked closely with utility industry, we obtained the knowledge of different business growth models and their implication on portfolio set up. We help utility companies to build their decision support system for strategic planning and ultimately improve business profit.