Strategy Execution Lifecycle – Partial life cycle from formulating and documenting to approving and endorsing
Background context – An energy utility has a long-term energy supply book that needs to be matched to a range of long-term offtake demands. Both the supply and demand book have i) a range of complexities in relation to minimum ‘take or pay’ and excess ‘take’ discounts ii) uncertainty regarding future supply and demand outcomes. The energy utility required a dynamic model to understand the commercial implications of taking on future supply and demand commitments – both in their own right and in relation to the impact on the commercials of the broader energy supply/demand ‘book’. In addition, the utility was negotiating with a range of new supply and demand asset owners and wished to understand the economics of the relevant assets and the ‘incentive’ energy pricing that would motivate the asset owner to invest in the asset that would contribute to future energy supply or demand.
Strategic Challenge – The energy utility had a range of independent standalone models that were mapping various parts of the current and future supply and demand book. None of the models were standard in approach and none of the models were integrated leading to a high risk of suboptimal strategic and commercial decision making.
Strategic Activities – Guberno joined forces with our financial modelling partner – Forecast Financial Modelling – to create a detailed but user-friendly financial model composed of two discrete but integrated components.
Firstly, the model mapped the current supply and demand contracts to enable the business to accurately model the impact of entering into new supply and demand contracts in their own right and the flow on implications to the overall contract book. This was important given the complexity of supplier contract provisions around minimum take or pay and excess discount provisions over time. The model also enabled distribution network capacity management to understand physical opportunities and constraints.
Secondly, the model enabled the client to map potential future supply and demand opportunities and understand the impact on the overall financial outlook for the business. Each energy supply and demand opportunity is modelled from the perspective of the ‘asset owner’ as bankable feasibility models for that asset to enable assessment of necessary energy incentive pricing to deliver target leveraged returns on investment for the asset owner.
Outcomes – The utility gained a powerful commercial business tool to enable them to enter into long term supply and demand commitments with energy customers in a way that optimised the outcome at both the individual contract level and in terms of the overall energy book. The business also gained an invaluable commercial tool that enabled insights into the relative investment economics of new supply and demand counterparties and by inference required incentive energy pricing to achieve targeted asset investment returns. The model facilitated a broad range of scenario planning in terms of sizing and operation of different combinations of the supply and demand assets.
