Introducing CENTRE

Just When are Energy Firms Going to Manage Their Credit Risk and Cashflow Appropriately?

Credit ENhancement of TRaded Energy

How often do customers have to be failed?

Energy is a capital-intensive industry with extreme competition and volatile prices: today the credit risk in the European energy sector has never been so high. So why are market players deficient in manage these risks?

Perhaps their financial backers don’t have the credit capacity to operate these businesses properly. Which means everybody, absolutely everybody, should be using Centre. It is inexcusable for any firm operating in the energy sector not to manage their price risk cash flow and investment efficiency without Centre: a source of margin capital, fee free that is dynamically managed, saving at least 3% on a organisations working capital needs for energy trading and general working capital.

Worked Example of the CENTRE Mechanism

A European generator and English energy retailer have an existing commercial relationship whereby the European generator regularly sells power to the English retailer.

Day 1

When we start to look at the credit and cashflow position on day one the market price for annual base load power is €50/MWh.

Therefore the value of the deal that the European generator has sold to English retailer €50 * 100MW * 8760 hours in the year which comes to a value of €4.38 million.

Day 2

The market price has dropped to €40/MWh. This means that the European generator has made a mark to market profit (MTM) of €10 * 100MW * 8760 hours in a year: which means the generators has an “in the money” (ITM) position of €8.76 million.

How Centre Saves Money and Gives Better Protection for the ITM Position

Assuming there are no other trades tonight off against one another then the English retailer is now a credit risk to the European generator, because if they fail, then the European generator would be out of pocket by nearly €9 million, so a €10 million letter of credit is requested. These are expensive instruments and the cost of the letter of credit is:

3% up front fee = €300K; plus
Lenders use Euribor as an index, which varies, to adjust interest rates as economic conditions change. In the city of London today that is 3 month Libor (today) = 0.13% (€30K); plus
They then add a certain number of percentage points called a margin, which doesn’t vary. Say in this case 3% (€300K);
Non untilisation fee of say 1.5% (€150K)

Total Cost = €780K.

With Centre the English retailer voluntarily goes into the Centre portal to make an approved payment instruction for payment in 90 days of €10 million. Within 2 days Centre passes €10million to the European generator within two days €10 million, less Euribor plus the investor spread (100bps) on a non recourse basis (no strings). This cash is then reinvested at LIBID to earn in come for 88 days.

The total cost of the Centre transaction is therefore close to 25K.

The numbers speak for themselves – why not make use of the Centre platform?