Pt. 1 Trading Wholesale

More often than not, horror stories in business aren’t made public. Maybe, for not wanting to humiliate someone, or so as not to embarrass an organisation. Or, if we want to be cynical, to bury incompetence.

The downside to this of course, is that the rest of us lose the opportunity to learn from these mistakes. In examining the actions that led to the mistake, learnings can be extremely valuable to us all. After all, it could easily have been our mistake in the first place, so an element of “There but for the grace of God…”, could well come to mind.

Here’s the uncomfortable truth: wholesale energy trading without proper protection can bankrupt your organisation overnight. And if you think having experienced traders protects you, think again.

The following is a true story that perfectly illustrates why no not-for-profit should be gambling with their resources in volatile energy markets. We have anonymised the parties involved, to protect their identities for legal reasons.

This organisation had 3,000 outlets with a combined energy spend of £100m per year. As you might expect with an organisation this size, they had their own in-house energy team. A team that included energy traders with years of experience operating in complex energy markets. Remember that.

They traded wholesale, or flex as it’s sometimes referred to. Typically, fixing 90% of their trades and leaving 10% free and floating. 10% with which to take advantage of the ups and downs of the markets, to achieve the lowest possible price over the course of the year.

For years, they basked in the results. Lauding their success in beating the markets. But in 2022, the same strategy proved catastrophic and ended up costing the organisation almost £100m. Their hoped for £500k additional bottom-line saving turned into a £90m increased energy cost. Ultimately, the customer was forced into an asset fire-sale to raise the necessary funds to cover the shortfall.

What happened? A perfect storm of events that no trader could have predicted or controlled. A fire at one of the UK’s most important electricity import points. Russia weaponising gas supplies through Nordstream 1. The invasion of Ukraine. Markets became highly erratic, suppliers pulled their price books, and trading became impossible.

In just over a year, electricity wholesale prices moved from £45 per megawatt hour to over £600. An increase of more than 1,500%. The 10% that had been left unsecured, which they thought would cost them around £10m, was now going to cost them £100m.

What every charity and not-for-profit needs to understand about wholesale trading

There is no ceiling to price if you aren’t fixed or haven’t capped your exposure. Wholesale trading in volatile markets can be catastrophic. Don’t let anyone tell you otherwise.

Your organisation takes all the risk. It’s not the broker; it’s not the energy company. It’s not the trader. It’s you. Having experienced traders operating on your behalf doesn’t mean a thing. Their job is to trade, not to run a business. By the nature of their role, they take risk and typically, it’s not their money they are risking.

You have a fiduciary duty to exercise financial prudence. If you aren’t capped or fully hedged, then ensure you understand the risk exposure you are putting your organisation in. Communicate that to your Board or Trustees to get their agreement, before signing anything. Ensure your organisation has the financial headroom to cover your losses.

The mathematics are brutal. To spell it out clearly, the example above shows one year’s disastrous trading activity was more than the savings they made over the preceding 20 years of successful trading. Now tell us again it was worth the risk.

Throughout the energy crisis, we have seen numerous not-for-profit organisations fall foul of trading wholesale. These include school MATS, councils, regional religious groups, large housing association groups, animal sanctuaries, crisis and care organisations, to name but a few. You would be surprised at just how many believe they can beat the markets. Bonkers really, if you consider no not-for-profit should be gambling with their resources.

Some schools saw their energy prices increase by 500% during the crisis, and guess what? They weren’t bailed out. They had to cut their staff and services, all because they were advised to trade wholesale by their own employers. Who lost out then? The energy companies? No. The traders? Absolutely not. The councils or DFE? Never, they didn’t have to pick up the pieces. The ones who lost were the children. The parents. The teachers. The school leadership team.

Categorically, and without exception, in our opinion no not-for-profit organisations should be trading wholesale in the current climate without being fully covered.

Yet despite the above, some of you might still be convinced it’s worth the risk. Perhaps because you feel informed and believe you know best. Perhaps because the wholesale mantra is being driven politically or centrally. After all, lots of councils, political groups and even the DFE recommend it.

If you are currently trading wholesale, ask your broker or supplier to carry out a risk assessment to establish your exposure. Get them to put it in writing. If they won’t or can’t give you a definitive position, then you need to ask yourself why.

If they won’t, then ask us, and we will. Trading wholesale is not something our sector should be doing without capping risk. Full stop.

Giles Hankinson
Chief Executive Officer