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Building Blocks

​How to Manage Block + Spot Contracts?

First of all, for those who clicked on this link thinking we were going to discuss Duplo© (I can sense your disappointment), let’s start by defining what a block + spot contract is.

A block + spot contract is one in which the consumer covers their consumption with blocks, meaning the standard contracts traded on wholesale markets (calendar, quarterly, monthly, base, or peak contracts), choosing the time of purchase. If their actual consumption differs from the purchased blocks, the spot price applies to the residual volumes. If the consumer wants to secure their energy price, they must ensure that the blocks cover their forecasted consumption as closely as possible, just as suppliers typically cover their clients' consumption.

 

Although previously reserved for very large consumers, these contracts have become more widespread, partly due to the volatility of electricity prices. However, they are complex for consumers to manage. In this article, we will explore the mechanics of how they work.

 

Why Block + Spot Contracts?

The energy crisis and price volatility have led to an explosion in financial risks related to energy supply. Suppliers have become increasingly reluctant to take on volume risks, meaning the risk of having to buy or sell energy volumes at a loss on the markets if their consumers don't consume as anticipated. This has resulted in significant risk premiums (several tens of euros per MWh, or even more, depending on the profile). Suppliers have also started to actively offer block + spot contracts to their clients, as with these contracts, they no longer assume volume risks and can therefore significantly reduce their risk premiums.

 

In a block + spot contract, the consumer takes on the volume risk. If their consumption forecast is incorrect, any missing or excess volumes will be bought or sold at the spot price.

However, the interest in block + spot contracts goes beyond a simple transfer of risk. In many cases, the consumer is better equipped than the supplier to forecast their future consumption, thereby reducing the overall volume risk. Block + spot contracts also provide more transparency on supply costs, as prices are based on wholesale prices, making them easier to compare.

They also allow for more precise risk management and a better understanding of the allocated ARENH volumes.

If the blocks can be resold, block + spot contracts also enable the consumer to easily take advantage of potential consumption optionality.

 

For example, if I buy 50 GWh of electricity for delivery in 2023 at the beginning of 2021 at 70 euros/MWh, and the price in the fall of 2022 rises to 800 euros/MWh, wouldn’t it make more sense to pocket 36.5 million euros and shut down my factory instead of continuing production? And if the 2023 price drops back to 150 euros/MWh on the spot market, couldn't I restart my factory, optimizing my gains even further?

 

In a ‘hostile’ market environment for consumers, these contracts have strong advantages and can unlock opportunities that were previously inaccessible.

Initial Structuring

An initial step in managing a block + spot contract effectively is calculating the blocks to purchase based on the forecasted load curve. The goal here is to find the combination of standard blocks that minimizes exposure to the spot market for a given coverage rate. For example, if the coverage rate is 100%, we would seek a combination of X MW of monthly base contracts and X MW of peak contracts that best covers the average consumption.

Energy suppliers often provide their own analysis of which blocks to purchase. Beware: the block combinations proposed by suppliers are not always optimal, as they often reflect the characteristics of the contract the supplier wants or is able to offer, not necessarily what you actually need. For instance, if you are a tertiary company, you may very well need monthly or even weekly blocks to cover yourself effectively. However, for simplicity in contract management, the supplier may only want to sell quarterly blocks and will present an analysis using only those contracts.

An external analysis and negotiation of the types of blocks available in the framework contract are therefore essential.

Tout d’abord, pour ceux qui ont cliqué sur ce lien en pensant que nous allions discuter de Duplo© (je sens votre déception poindre), définissons ce qu’est un contrat bloc + spot.

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Capture d'écran d'un outil de structuration -Plateforme NOOS

          Executing Transactions

It’s good to know which volumes to buy and for which terms/types of blocks, but you still need to decide when to buy them. Since you can't predict the future, you will need to manage risk and spread out your purchases over a certain period (e.g., one year). You can also set stop-losses based on your exposure. For example, if your uncovered volume multiplied by the price of the Q4 2024 block exceeds 5 million, you automatically buy to avoid a negative impact on your business. When the time comes to buy, you will need to consult your supplier(s) to get a price, trying to take advantage of any potential market dips.

If selling blocks is allowed in your contracts, and if you are an industrial company, we strongly recommend negotiating this option. It is essential to track the P&L (profit and loss) of your transactions. How much would you be paid or would you have to pay if you unwound a transaction at today's price? This information is important because it can help you adjust or stop production if the P&L of certain transactions reaches a sufficiently positive level (i.e., higher than the costs incurred by reorganizing or stopping your production).

           Monitoring

It’s relatively easy to estimate the cost for the volumes you’ve already covered, but it’s very difficult to estimate the cost of uncovered volumes. Additionally, if your load curve varies hour by hour, even if you're 100% covered on average, some of your volumes will be valued at spot prices simply because blocks do not perfectly match your consumption pattern. But how can you estimate the spot price, which is only known one day in advance, to estimate a budget? The best approach is to use an HPFC (Hourly Price Forward Curve), a forward price curve at the hourly level, which will automatically adjust with the market and converge towards the spot price.

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Capture d'écran d'un outil de suivi - Plateforme NOOS

But the monitoring doesn’t stop there. You also need to be able to verify actual performance to detect any potential anomalies in the amounts invoiced by suppliers. It’s also useful to integrate your potential production (CPPA, solar self-consumption, cogeneration, etc.) to get a complete view of your energy budget.

Whether it’s for structuring, execution, or monitoring, managing block + spot contracts without dedicated tools is complex, and an error can have significant consequences. Fortunately, Augmented Energy is here to help. We can provide you not only with powerful tools but also with in-depth expertise in energy markets.

For more information, contact us at sales@augmented.energy

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