The spread of COVID-19 has had a significant effect on financial markets around the world. Virus-related shutdowns have impacted economies and businesses in ways that were not thought possible a month ago. The energy sector is one of the many industries experiencing an impact and communicating these impacts to end-users can help them manage their risk and costs during this time. Energy suppliers are reacting to this global crisis and closely examining their risk, as concerns grow that many businesses are experiencing hardships and changes in usage and operations. These circumstances change the way that suppliers and end-users may need to evaluate their own risk.

Below are the primary areas of concern, that we need to be aware of.

Credit Risk
The current market has made suppliers evaluate risk credit. They have reacted by tightening credit standards, which may require more information for immediate start dates through October 2020. With the uncertainty around certain industries, suppliers have been examining impacted business sectors more closely.  Businesses in the hospitality (particularly restaurants and bars), gym, hotels, and theater industries are currently facing the highest impact. While there may be some initial pushback, we can help you navigate the current market and find products that may present less credit risk to suppliers.

Increased Risk Premium Modeling
The energy industry is dealing with big changes in clients’ usage patterns, previously unheard-of government policies and regulations, as well as other uncertainty in fundamental market functionality. Suppliers are changing their pricing models to account for the uncertainties of energy volume consumption fluctuations, potential renewable requirement impacts, and most importantly capacity cost complications. There are several components that go into an energy bill besides the cost of the actual energy, with the second largest charge usually being the capacity component. 

Why capacity risk is a concern?

To better understand capacity, think of it as a form of electricity insurance. Capacity is a daily dollar cost, not a per-unit cost. It is priced based on customers’ estimated cap costs and usage volumes. If there is uncertainty on suppliers’ end, an additional risk premium is added to make up for the risk.

Here’s an example:

Before Covid-19

  • If the capacity cost per month for a customer is $2,000
  • Customer uses 100,000 kWh/month
  • Cost per unit kWh is $.02

After Covid-19

  • Capacity costs stay the same at $2000
  • Usage drops to 75,000 kWh/month
  • The cost per unit is $.026, which means a $.006 difference per unit that needs to be built into suppliers’ risk.

While Covid-19 has had an impact on the energy markets and the components that make up the total cost there are different solutions that are available that can help balance the risk and the cost through this time. Please reach out to your account manager and we will work with you to find the right solution for your individual circumstance. We are here to help you navigate through the changes and to work together so we can all come out of this on the other side. We are in this together.

 

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