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Issue
The senior management of one Europe's largest electricity users
needed to respond to a major increase in costs caused by the expiry
of advantageous long-term electricity supply contracts. Deregulation
of the local electricity market had forced the company's traditional
supplier to adopt a much more commercial focus in their pricing
and supply contracts, so a review of alternative strategies for
electricity procurement was urgently needed.
Solution
The company's finance and business operations team selected Lacima
for its experience and reputation in the energy risk management
marketplace. Lacima conducted a strategic review to identify the
company's best strategy for buying electricity. This review identified
the pros and cons of current methods and suggested a range of
alternatives. An important additional element of Lacima's work
was knowledge transfer and further boosting the expertise of key
staff concerning risk management in the area of electricity trading.
Benefits
The strategic review highlighted an opportunity to benefit from
more sophisticated strategies for electricity trading, which the
company adopted. As part of this work, the company acquired much
greater abilities to evaluate proposals from electricity generators,
and as a result was able to obtain much better pricing and terms.
By increasing its energy risk management capabilities, the company
has been able to reduce the variability of the company's profitability
which its previous energy trading regime was not able to address
adequately.
Issue
Directors of the energy markets division of a large financial
services company were driving high growth in their business through
a move into physical energy trading. By doing so, the division
would be able to take on and manage the physical exposures arising
from energy assets being acquired by their parent company’s
investment banking arm.
The directors also wished to assist the investment banking team
to value potential energy asset purchases, and to offer financial
hedges to external customers such as airlines, refiners, and other
large energy users. Importantly, as a by-product of being active
in physical markets, the division’s energy trading team
also gained access to information of significant help in boosting
profits from financial trading.
While risk analytical resource was available to the energy trading
team through the company’s internal operations, it was neither
a dedicated resource, nor did it specialise in energy markets.
It was therefore decided to support the energy market division’s
growth plans by outsourcing part of the division’s risk
evaluation and deal analysis needs to a firm of well-regarded
experts. Critical to the success of this move would be the consulting
firm’s ability to add value through advice on trading strategies
across a broad, and evolving, range of scenarios.
Equally important would be the deal support provided to the investment
banking arm, supplementing discounted cash flow valuation techniques
with additional perspective and insight (usually in the area of
the asset’s embedded optionality), to guide more profitable
asset price setting and bid decision making.
Solution
Lacima was chosen to provide these services because of its unique
combination of practical experience in energy markets and its
world-leading research base in valuation, hedging, and risk analytics.
Of particular interest was Lacima’s ability to build tailored
solutions to the team’s specific requirements in highly
varied problem areas – and to do so rapidly, using well-proven
methods and flexible analytical tools of known reliability.
Benefits
The move to an outsourced risk advisor enabled the energy trading
team to significantly extend the financial services company’s
ability to evaluate and participate in all facets of the energy
sector.
The return on investment was further boosted by the energy market
division’s decision to add this analytical capability without
adding to fixed costs or headcount. The on-demand aspect was also
viewed as of considerable benefit, since substantial peaks in
workload could be accommodated smoothly while maintaining high
quality.
Issue
The director of infrastructure investments at a large financial
services company was considering purchasing a number of electricity
power plants, but was unsure what prices would represent good
value and provide the returns needed.
On the advice of the company’s energy trading team, it
was decided to supplement the asset valuation estimates made by
the deal team with an additional view, based on the optionality
values inherent in the power plants.
The energy trading team recognised that it needed very high quality
analytical work performed which was outside its normal area of
expertise. A decision was therefore made to use the services of
a consultancy with specialist energy valuation, hedging, and risk
analytics capabilities.
Solution
Lacima was identified as having proven plant modelling abilities,
being able to incorporate multiple real-world factors into a complex
pricing process.
Using Lacima's Single Factor Simulation Engine, the fuel and power prices were modeled
for the market
where each power plant was located. Lacima’s plant model
was then used to value the optionality inherent in the power plant’s
fuel supply, various management strategies for running the plants,
and the hedging strategies around the energy contracts associated
with each power plant.
Benefits
As a result of Lacima’s work, it was clear that the prices
being offered by rival investors would not yield a good return
on the investment, and the decision was taken not to continue
negotiations, thereby averting an uneconomic purchase as well
as saving valuable time and effort on behalf of the deal team.
Issue
The directors of a publicly-traded retailer of gas and electricity
needed investigation and advice on any areas where their company’s
risk quantification methods might fall short of industry best
practice.
Lacima identified substantial valuation deficiencies, potential
financial exposures and opportunity costs caused by current practices,
and provided advice on best practice techniques which would substantially
reduce this.
Solution
Lacima was selected for this work because of its experience and
understanding of the market for credit risk measures in the energy
industry.
Of particular interest were the analytical tools developed by
Lacima, and their ability to incorporate best practice specific
to this customer’s risk management objectives and circumstances.
Benefits
Taking a sample portfolio of the company’s energy contracts,
statistics generated using best practice techniques could be compared
with the results obtained by the company’s current practices.
This highlighted both the scale of the problem and the areas where
corrective action could be taken.
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Overview
