Managing shape and imbalance risk in power procurement

Corporate procurement managers, energy managers, and finance and risk stakeholders can help reduce non-obvious cost leakage and negotiate smarter contracts by understanding the proper drivers of supplier pricing. For example, forecast uncertainty and load volatility can drive supplier premiums, but procurement teams can minimise these costs by analysing data, designing contracts, and aligning operations.

This blog looks at shape risk and imbalance risk in plain procurement terms, and show how these risks translate into supplier pricing and premiums.

What "shape" and imbalance risk mean for buyers

Certain factors can affect energy pricing, depending on how much or how little you use.  

Shape risk

Shape risk is the mismatch between the contracted baseload and the actual usage profile. This is usually because larger energy contracts provide steady supplies at a lower cost to suppliers, at a fixed rate. However, if a consumer goes above that baseload amount, they will have to pay a higher spot price to fulfil their energy needs. They may also have to offload energy they don't use for a lower price than they paid for it.

Imbalance risk

Settlement exposure occurs when actual usage differs from the energy supplier's periodic forecast, and penalties are applied to buyers to offset the difference. This is known as an imbalance charge. Buyers receive these penalties because grid operators use these forecasts to balance the grid. When a procurer's energy usage exceeds the agreed amount, it can affect supply and demand elsewhere in the grid. 

These risks have grown with renewables because they rely on an intermittent power source (the weather), leading to more volatile pricing. The procurement implication is that it's not just how much you buy, but when you use it, that's important for pricing to avoid shape and imbalance risks.

How suppliers price shape risk into contracts

Suppliers can recoup the costs of unpredictable energy consumption by charging for it on energy bills.

Suppliers forecast your load and add risk premiums if uncertain.

When the energy market is volatile, suppliers often add premiums to energy pricing to cover financial losses, including the difference between a customer's actual consumption and the agreed forecasted consumption. This is called a risk premium. Other premiums that could be added include spiky loads, poor data, volatile operations, or weak tolerance bands. 'Premiums can show up in offers in different ways, for example, a hidden uplift is costed into the contract as a single energy price. In explicit imbalance pass-through, extra energy costs are added on afterwards more transparently. Typical differences between large multi-site buyers and single-site buyers are volume. Multi-site buyers have a stronger negotiating position because of the volume of energy they are buying. In contrast, single-site buyers have less leverage and contracts tend to be less flexible, with greater dependence on a single energy source, which could leave them vulnerable to price volatility.

When buyers can retain vs transfer imbalance exposure

When entering an all-inclusive supply, energy suppliers incorporate the cost of risk into the price, creating a more costly but also more stable energy environment for the procurer. An imbalance-pass-through model, on the other hand, places risk on the buyer through contractual agreements that may be lower or higher than the premiums under an all-inclusive contract. Retaining risk makes sense when strong forecasting and flexible operations are desirable; however, it may be better to transfer the risk when high volatility is experienced, and internal resources are limited to manage it.

Tools to reduce shape risk before contracting

Analytical and operational tools can be applied before contracting to help shape the agreement's risk in advance. Load profiling and segmentation examine historical data on baseload, peak load, and discretionary load to understand past performance patterns and predict future supply and demand. This could be gathered using smart meters to measure a customer's energy consumption over a specific period. 

In the case of renewables, weather normalisation streamlines this data to determine the usual effects of weather conditions on a baseline. Operational forecasting allows forecasting within specific time periods, examining the price and supply vs. demand relationship.

Procurers can also identify controllable peaks, for example, high-energy industrial operations, and switch to a lower-demand time period.

Using interval data can help present a stronger risk case to suppliers by breaking performance data down to a more granular level, showing energy consumption on a weekly, monthly, or yearly basis.

Contract clauses and governance to manage risk over time

To mitigate risk through contract terms, various financial tools can be employed. One of these is volume tolerance bands, which define the acceptable range of energy a business uses on an annual basis. You'll need to determine the width of each band and which penalties apply to it.

Shape clauses will also need to include agreed baseload profiles and reset mechanisms, as well as imbalance settlement transparency requirements, so that no unexpected penalties occur after contracting. Finally, set a review cadence so you know where your actual energy consumption sits in relation to the monthly forecast. Buyers who understand shape and imbalance risk don't just get better prices; they get contracts that stay good as operations evolve.