How to optimise your energy market operations

Can you explain Montel Price it in a nutshell? 

Price it is a company that myself and some fellow students set up in 2005, with the aim of providing mathematical modelling services to the financial sector. Today we’re a company of eight people, providing products and services to a variety of energy market players. By giving them a better understanding of what the future is going to bring, we want to help companies increase their profits and hedge their risks.  
 
We do this through two main products that are available ‘off the shelf’ on a subscription basis: Price Forward Curves (PFCs) for all major European energy markets, and a 15-day spot forecast for the EPEX SPOT day-ahead and intraday (ID15) auctions. We also develop custom software to help power producers optimise their scheduling and production, as well as specific price simulations that cover different markets and commodities.  

Why did you set up Price it?  

We wanted to bring modern financial mathematics to, what was at the time, a very old-fashioned business.  

The story really begins when I was a student, studying econometrics. I was working on a project on imperfect finance markets, where we had begun to develop models that could value credit default swaps, which would eventually become well known as one of the triggers of the financial crisis in the US in 2008.  

When we set up Price it, we wanted to focus on the same subject, in financial markets. But we found it really difficult to break into the market, as just a few guys without contacts. Then, by chance, we came across EEX in Leipzig and saw that they were dealing with derivatives, which gave us the idea to bring this technology to the energy market.  Our first client was actually someone we went to for data, as he was working on a doctoral thesis. He gave us his data and then the company he was attached to, Stadtwerke Leipzig, eventually employed us to create models for them. 

Can you tell us more about Price Forward Curves? 

Of course! Price Forward Curves (PFCs) are our core product – although we are providing more and more custom services as we go into our 16th year of operation. We have PFCs for every major European gas and electricity market, and we also offer them for coal and carbon (EU emissions trading).  

PFCs translate the prices of the futures market into prices for delivery. So, in the electricity market this will vary from 15 minutes to an hour, depending on the price area, while in the gas market this is typically daily. The value of this for a market player is to help them understand how much a futures contract will they have to buy in order to be balanced at their delivery level, for each hour of the day, or each day of the month.  

Having this information means they can make more informed decisions about what to buy and sell, or how to schedule their production. They can develop more complex and nuanced strategies than if they were just having to take a simple average of the contract. This means they can better manage their risks and more importantly, be more profitable! 

An important note: PFCs are often mistaken for forecasts, which they are not. They’re entirely based on market data and movements. We don’t make much use of fundamental data, because most of this is already embedded in the prices themselves. In this sense they are best seen as dynamic and objective representations of futures markets. 

Who can make use of Price Forward Curves? 

Anyone who’s actively involved in energy markets! Even in a single company, multiple departments can make use of PFCs. Those in charge of portfolio management will use them to understand their options (power plants are an excellent example of real options) and develop long-term strategies. Risk managers will use them to quantify portfolio risk at any given time and develop reporting tools. Sales and procurement departments will use them to help price contracts and OTC deals.  

We’re also seeing more and more investors demonstrating interest in them. These might be companies or individuals who are relatively new to the energy market, and PFCs are tools they recognise from other financial markets which they can use to get a good assessment of the market. 

Even companies who make their own Price Forward Curves sometimes use ours as benchmarks, given our experience. As such, many depend on experts like ourselves to provide this product. I should also add that companies are very careful not to disclose which PFCs they are using, nor how they are constructed: that could potentially reveal their trading strategies! 

What about the other services that Price it offers? 

We’ve worked closely with mid-sized utilities since we started Price it, our first client was a Stadtwerk after all, and are able to develop software, models and tools that help our clients manage their portfolios and assets effectively. Our software offering allows us to make price simulations that cover multiple commodities and markets – essentially you get thousands of PFCs with that – based on sophisticated cross-commodity models.

As an example, we’ve helped some companies make investment decisions – such as how much district heat storage to construct for their power plant – by using our skills to develop precise valuation models.

Beyond that we are able to provide services to power plants – Combined Heat and Power is especially interesting in that scenario – that help managers decide when to schedule production and when to conserve their storage reserves.  

In the future, more and more companies will need these services as the market becomes ever more volatile and fast-paced. The growth of intraday trading in electricity markets, partly because of renewable generation, is an excellent example of this. For power producers, especially larger plants, it’s going to be ever more important to be able to anticipate movements in markets. Which is exactly what we’ve been trying to do for the last 16 years!