Smart Energy Voices - Episode 6
Integrating an Offsite Renewable Purchase into Your Energy Risk Strategy with Gregory J. Kosier
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Today two “dinosaurs in the industry” Peter Kelly Detweiler and Greg Kosier — former colleagues at Constellation with nearly 50 years in the industry between them — talk about how buyers manage their energy risk in terms of legacy buying, the way it used to be done, and today’s renewable power purchase agreements.
There’s a wealth of knowledge to be gained when you have the chance to listen in on a conversation between people who have been in the industry as long as these gentlemen have. Make sure you tune in and consume all the wisdom they have offered up.
You will want to hear this episode if you are interested in...
- How to manage risk in the legacy [2:43]
- Determining a customer’s risk profile [4:02]
- Paying for certainty [5:22]
- The challenge of diversification [6:25]
- Buying large amounts of a vulnerable commodity [9:14]
- Adapting to accommodate a PPA being dropped in your lap [13:17]
The bread & butter aspects of energy risk management
If you’re looking for a primer on how to look at energy risk management, our guests today provide a number of helpful tips. Number one in terms of focus for buyers is buying at market where you have whittled down your margin with a supplier or where you’re not including a lot of forward premium in the price. Another top focus is going to be to reduce volatility and spend, that would be evening out what your costs are either by month or by quarter.
Then take into consideration goals like meeting or beating budget. Basis risk, which is the differential between where you're buying energy and where you consume it. That's something that's going to be a really important part of the conversation when you bring a renewable purchase into the mix. Then as a buyer, you're going to have some corporate directives like volume restrictions, term restrictions, concentration of risk, so that you don't have all of your energy supply eggs in one basket.
Managing a Broad Range of Risk Profiles
How much care are you taking to assess each customer’s risk profile? What risks are your clients comfortable with? Figuring this out requires that you ask a series of questions and sometimes ongoing dialog over the years. Looking over a range of clients— the risks can be very broad— you have to know who is willing to take them and who is not.
We might see that buyers who have a lot of commodity in their portfolio like a manufacturer, may buy shorter-term and they might buy something that feels more index-based. They may not necessarily want to buy a great deal of energy in advance because they want their prices to be as close to market because energy factors into such a large portion of their cost stream. They may want to buy their energy very close to market price. Then you may have retail or the hotel industry, for example, where they need to know what the costs are going forward for two, three, four, even five years, and they may want to have a large portion of that budget known in advance. They'd lean towards the conservative side. In any event, to help an energy buyer build out their budget, you're going to have to have some sense of what these goals are beforehand. In a sense, they are paying for certainty.
From Negative to $9k a Megawatt-hour… What Could Go Wrong?
When you have a large customer and you are buying tens of millions of dollars or more of the most vulnerable commodity in the world… what could go wrong, right? Add to that the real complexity of renewables, buying from a specific wind or solar project, and you add a whole host of challenges that buyers have to think about. What are the characteristics that a renewable purchase brings to the portfolio?
You may have an overlap of existing purchases. The renewable PPA could coincide with energy you have already committed to, overlapping and putting you into an overbought position for a period of time. The other aspect is going to be an uncertain start date, especially in the case of new build projects when you may not necessarily know exactly when that energy is going to arrive. You may have a target start date of January 1, 2021, but whether or not the developer hits all the construction deadlines to get that project online is still a variable. So you may have an uncertain start date and that's very unfamiliar territory for a legacy energy buyer.
Connect with Gregory J. Kosier
Gregory J. Kosier, Director, Commodities Management Group, Constellation
Gregory Kosier is Director of the Commodities Management Group for Constellation, a subsidiary of Exelon Corporation (NASDAQ: EXC). In this role, he is primarily responsible for leading a team involved in structured power and natural gas transactions for Constellation’s industrial and large commercial customers, including structured power agreements, fundamental analysis of power and fuel market trends, and risk mitigation strategies. Over his more than 25-year career in energy, Mr. Kosier has been an electricity trader, portfolio manager, and lead for Constellation’s west retail business.
Prior to joining Constellation, Mr. Kosier was the head of west electricity trading for AES and a management consultant responsible for the appraisal and valuation of utility generating stations throughout New York State. In the early days of energy deregulation, Mr. Kosier developed the models used to value a generation site’s real property assets such as generation, transmission, and distribution infrastructure as well as the value of a site’s natural resources.
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