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Ready for Energy Market Risks? Introduction to Risk Management Approaches

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Ready for Energy Market Risks? Introduction to Risk Management Approaches Ready for energy market risks? Introduction to risk management approaches Tokyo, Power Market Seminar METI, June 14th, 2018 Within the past decades, major failures and unusual events have increased the awareness on financial and commodity risks Illustration – Energy and financial risk events Financial 1988 1993 1994 1995 1998 2005 2008 2010 2011 2014/15 2016 2017 2018 Basel I G30 Recom- JP Morgan Barings LTCM failure Basel II Societe Dodd-Franck UBS loses Historically Japan Deutsche Mifid II and sector agreements mendations introduces failure Basel I agreements Generale Act brings USD 2 bn. low interest adopted Bank posted Mifid to apply Risk Metrics agreements loses EUR 5 major on trading rates negative its third to all member reviewed bn. on trading financial positions interest rate consecutive states in the positions reform in the MF Global policy loss in a row EU US bankruptcy Basel III agreements Oil & Gas 1980's 1993 1994 2004 2005 2006 2008 2011 2012 2014 2015 2016 2017/18 First oil MGRM loses Orange China Delta & British gas Oil price Spot Asian Gas prices Significantly Ryanair Tullow Oil Small airlines derivatives USD 1.5 bn. County Aviation Northwest prices turn spikes to USD LNG prices reach a 10- decreasing losses EUR slumps to face a brutal on oil loses USD loses USD Airlines go on negative for 3 147/ barrel increase year low in oil price 200 mn on GBP 1 bn reckoning as products 1.6 bn. on oil 550 m on oil chapter 11 days 25 airlines ~50% the US failed oil price loss as low oil prices products products due to Amaranth cease activity following gamble oil prices bit surge soaring oil loses USD 6 in six months increased into revenues prices bn. on US due to 2007- post- gas market 2008 oil spike Fukushima demand Electricity 1996 1998 2000 2002 2003 2005 2007 2009 2010 2011 2013/14 2016 2017/18 First Liberali- California Enron & US British Opening of Price of EU Power price Market Fukushima Negative Brexit and US blames & Others electricity zation of Crisis merchants Energy quasi European CO2 crashes spikes to coupling put nuclear clean dark potential Russia for futures (US German German bankruptcies bankruptcy CO2 market to zero EUR 3000/ in place in disaster, spread impact of UK cyber attacks and Nordpool energy Renewable MWh in Continental shutdown of leaving EU- on energy in Europe) market Energy Act France Europe 9.7 GW ETS grid in US nuclear and Europe capacity Source: Press articles, Roland Berger analysis METI_energy_markets_seminar_14062018_VF.pptx 2 10000 SILVER SILVER Source: Bloomberg, Euromonitor, Roland Berger analysis Roland Berger Euromonitor, Source: Bloomberg, participants creating risksformarket Commodity priceshave beenveryvolatile, US$/MT] COPPER 2000 4000 6000 8000 20 40 60 0 0 Jan-00 Jan-00 Dec-00 Dec-00 [Spot price, Nov-01 Nov-01 [LME Copper 3 Month Rolling Forward, Oct-02 Oct-02 Sep-03 Sep-03 Aug-04 Aug-04 Jul-05 Jul-05 US$ Jun-06 Jun-06 May-07 May-07 /OZ] Apr-08 Apr-08 Mar-09 Mar-09 Feb-10 Feb-10 Jan-11 Jan-11 Dec-11 Dec-11 Nov-12 Nov-12 Oct-13 Oct-13 Sep-14 Sep-14 Aug-15 Aug-15 Jul-16 Jul-16 Jun-17 Jun-17 May-18 May-18 COTTON COTTON 100 200 300 400 100 200 300 400 0 0 Jan-00 Jan-00 [ESALQ Cotton Spot Price/Brazil, BRl/pound] Dec-00 Dec-00 Nov-01 Nov-01 Oct-02 Oct-02 Sep-03 Sep-03 Aug-04 Aug-04 Jul-05 Jul-05 METI_energy_markets_seminar_14062018_VF.pptx Jun-06 Jun-06 May-07 May-07 CORN Apr-08 Apr-08 Mar-09 Mar-09 Feb-10 Feb-10 [Spot price, Jan-11 Jan-11 Dec-11 Dec-11 Nov-12 Nov-12 Oct-13 Oct-13 Sep-14 Sep-14 Aug-15 Aug-15 US$/ Jul-16 Jul-16 Jun-17 Jun-17 MT] May-18 May-18 3 Source: EIA, Bloomberg, Roland Berger analysis Bloomberg, Roland Source: EIA, Auction Price,EUR/MWh] ELECTRICITY especially electricity, that cannotbestored(sofar) especially electricity, even morevolatile, energy is the commoditiesworld, Within CRUDE OIL OIL CRUDE 100 150 100 50 20 40 60 80 0 0 Jun-00 Jan-00 Apr-01 Nov-00 Feb-02 Sep-01 Dec-02 Jul-02 [WTI SpotPriceFOB,US$/BARREL] Oct-03 May-03 [EPEX Phelix Day-Ahead Electricity Aug-04 Mar-04 Jun-05 Jan-05 Apr-06 Nov-05 Feb-07 Sep-06 Dec-07 Jul-07 Oct-08 May-08 Aug-09 Mar-09 Jun-10 Jan-10 Apr-11 Nov-10 Feb-12 Sep-11 Dec-12 Jul-12 Oct-13 May-13 Aug-14 Mar-14 Jun-15 Jan-15 Apr-16 Nov-15 Feb-17 Sep-16 Dec-17 Jul-17 NATURAL GAS NATURAL 0.4 0.8 1.2 1.6 25 0 1 5 Jan-00 Jan-00 Nov-00 Nov-00 Sep-01 Sep-01 Jul-02 Jul-02 May-03 May-03 Mar-04 Mar-04 [Henry HubSpotPrice,US$/MMBTU] Jan-05 Jan-05 Nov-05 Nov-05 METI_energy_markets_seminar_14062018_VF.pptx Sep-06 Sep-06 EURO/DOLLAR Jul-07 Jul-07 May-08 May-08 Mar-09 Mar-09 Jan-10 Jan-10 Nov-10 Nov-10 Sep-11 Sep-11 Jul-12 Jul-12 May-13 [1€ = xUS$] May-13 Mar-14 Mar-14 Jan-15 Jan-15 Nov-15 Nov-15 Sep-16 Sep-16 Jul-17 Jul-17 May-18 4 Volatility only appears in liquid and competitive market – Japan is only at the beginning of this journey – Time to get prepared Legacy utilityCompetitive supplier Share of Competitive supplier [%] 12 13 Electricity 12 12 12 12 12 [TWh] 11 12 Emerging wholesale market, 10 driven by retail market 9 9 9 9 8 9 liberalization 8 8 8 8 7 > Active retail market with 6 83 76 79 77 78 81 5 71 75 70 74 70 73 72 74 broad diversity of profiles, yet 67 63 64 67 65 63 63 65 66 modest volume 72 70 72 70 64 68 64 71 > Still modest wholesale 63 65 69 61 60 64 67 63 57 56 63 57 58 59 60 market trading volume – 4 4 5 6 6 6 5 5 6 7 7 7 6 7 7 9 9 8 8 8 9 10 10 Low liquidity and market 04/1605/1606/1607/1608/1609/1610/1611/1612/1601/1702/1703/1704/1705/1706/1707/1708/1709/1710/1711/1712/1701/1802/18 depth Natural gas 12 12 > Wholesale market 12 11 11 [Mm3] 11 10 11 dominated by bilateral/OTC 9 4,744 4,514 8 9 4,171 trading - Japan Power 3,738 3,418 3,456 3,219 3,082 3,282 3,085 3,111 Exchange (JEPX) still 4,294 marginal² 3,755 4,075 3,453 2,963 2,816 3,084 2,942 2,751 2,775 3,107 285 255 267 334 339 334 336 349 417 450 439 04/17 05/17 06/17 07/17 08/17 09/1710/17 11/17 12/17 01/18 02/18 Source: Japan Electricity and Gas Market Surveillance Commission METI_energy_markets_seminar_14062018_VF.pptx 5 For utilities and retailers, the risk management imperative starts with the possibility (the obligation?) to trade energy, physical or financial > Opening of the possibility to Other market exchange commodity via players (OTC) bilateral wholesale contracts > Purchases of fuels (oil/gas/coal/…) > Purchase of electricity Suppliers / Utilities / Clients Other utilities Retailers > Sales of physical commodity delivery contracts > Sale of energy services, price visibility Organized Regulator > Existence of a market place for markets the commodity, with visible, volatile market prices Source: Roland Berger analysis METI_energy_markets_seminar_14062018_VF.pptx 6 In a fully liberalized market, assets and client base are optimized vs. the market – Illiquid market call for gradual optimization Optimization method according to market liquidity Hypothetical portfolio with volume 1 Optimization in 2 Optimization in risk a liquid market a non liquid market > Each position is optimized separately > Portfolio resources and commitments are against the market optimized globally (under retail supply constraints) > Residual flexibilities are optimized against the market MARKET Power generation / Storage Contracted (flexibility) MARKET L/T contract (flexibility) Contracted L/T contract (firm) (ferm) BOUGHT SOLD Source: Roland Berger Strategy Consultants METI_energy_markets_seminar_14062018_VF.pptx 7 Portfolio Management and Trading help structure and manage risks PM&T function overview Input Processes/activities Output > Asset Portfolio Management (PM) characteristics > Portfolio structuring > Portfolio optimization – Fuel – Fuel sourcing (type of fuel, contracts, …) – Fuel contracts utilization > Power procurement – Influence on generation fleet (LT vs. sport, flexibility,…) plants contracts (repowering level of flexibility, …) – Own generation vs. dispatch program – Generation – Orientation of customer portfolio ( purchases plants contracts, management / interruptions of > Network loads, …) scheduling –Customer loads > Delivery Trading (T) program > Financial and > Flow Trading (power, gas, coal, oil) buy/sell transactions, for external risk > Trading parties and for the portfolio manager ("window to the market") expectations transactions > Asset-backed Trading > Market > Proprietary/own account trading conditions (price, volume, liquidity) Risk monitoring & control Source: Roland Berger Strategy Consultants METI_energy_markets_seminar_14062018_VF.pptx 8 Energy utilities and other commodity-intensive companies are facing significant risk management challenges Wholesale markets • Increased price volatility • Difficulty to forecast prices • New and evolving market places / market indices • Technical / logistical constraints (transport, storage,…) Business model • Geographical expansion/acquisitions Scrutiny from financial community • Multi-commodity exposure • Financial predictability / performance management • Sourcing and hedging strategies • Focus on multiple P&L, balance sheet and cash • Role of "trading" indicators • Organization, P&L responsibilities and transfer price schemes • Risk governance and control as a must Customer needs • Flexibility driven offerings with complex contract structures Commodity Volume uncertainties • Coexistence of tariffs and competitive offers • Supplier / customer consumption uncertainties • Difficulty to impose premiums / penalties risk management (temperature, hydrology, physical failures, ...) • Difficulties to pass-through cost increases to customers challenges calling • Contract / load modeling challenges (competition,
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