5 Tips for Effective Portfolio Management

Given the lack of real-time price volatility during peak demand seasons, what are the biggest fears you have with your portfolio management strategy? And, more importantly, how have these factors impacted your as-realized contract margins? Mitigate your risk with TRUELight's 5 portfolio management strategy best practices.


In our 50+ years of experience executing trades in the wholesale and retail power markets, we have identified some key data points and drivers that should be in the minds of every energy marketer in order to develop and execute a solid portfolio management strategy.


Here are TRUELight’s portfolio management strategy best practices:


1.) Data is your best friend


Every sound portfolio management strategy has to start with a strong appreciation for data integrity and the daily net open position process. Your current net open position will most likely be based on long term normalized weather data with short term forecasted weather for your intra month position management needs. In addition to this, emphasis must be placed on the state of your portfolios before each peak demand season to understand how your position will move under specific weather scenarios.


Once you have your data position process in a good place, you need to understand where the risk lies in your book each month. Your primary focus should be to understand how your customer usage will change during your peak heating and cooling demand seasons. We like to call this variable load risk management.


The standard has been to ensure you are not short heading into a peak demand period and, as a result, over-hedging has often been pushed by portfolio managers and credit providers. However, given the large changes in intra-month temperatures the last few peak demand periods, the potential of being over-hedged is a new concern. With TRUELight Portfolio and Risk Management support, data is the driving force in developing a prudent strategy.


2.) Risk policy matters


Every retailer needs to have a risk policy in place to govern how to pragmatically hedge and manage open positions, while also allowing for enough flexibility to match the volatility of retail energy. The policy should allow for flexibility to be under-hedged against your average positions during specific seasonal periods as to avoid being 100% hedged, or flat, for every time period. As we have seen with the last three peak demand seasons in a few of the larger retail load serving markets, the lead up to these periods produced strong forward price volatility that wasn’t matched by hourly clearing prices intra month. Ability to balance your position intra-month or even sell off a few hedges should be discussed to allow for greater flexibility to actively balance your positions.


3.) Pricing and market intelligence also matters


Now that you have a solid net open position, it’s important to understand how data flows into your position and have some flexibility to manage a dynamic portfolio in less liquid load serving settlement locations. While zonal forward curve accuracy is tough to come by, it is needed to ensure you do not let additional booked margin erode when you go to hedge in the wholesale market. An efficient hedge execution process should seek offers from multiple counterparties and use the benefits of competition to obtain the best possible price while not compromising timeliness to finalize the transactions during volatile trading days.


4.) Nobody's perfect


The one thing to remember in any risk management strategy, or hedge execution strategy, is that the strategy is designed to take risk off the table as much as possible. The reality is that you will never time the market perfectly or hedge when forward curves are their lowest. Even the best of us can’t always predict forward market movements correctly, but that doesn’t mean you don’t hedge at all or throw out a sound portfolio management strategy because a few peak demand seasons did not produce clearing price volatility. Persistence is key, and digging into the changes on customer’s demand over time is necessary.


5.) Don’t forget the small stuff, like RECs


Before we sign off for this week’s TRUELight Talk, I also want to note that it is important to sweat the smaller positions, like the bilateral capacity and RPS requirements. They may not be your every-day portfolio management focus, but you still need to incorporate these positions into your daily net open position process to avoid seasonal surprises.


These 5 top factors have a significant and dynamic impact on any firm’s realized energy costs, which is why incorporating them into your process is fundamental and can lead to a competitive advantage for your firm.


We can help you put a solid plan in place and give you the essential data points to execute this strategy. We have years of previous experience actively managing positions at the largest retail firms in the industry, and take pride in our reputation for helping customers realize higher margins.



To learn more or schedule a time to chat with our TRUELight experts, contact sales@truelightenergy.com.

© 2019 by TRUELight Energy LLC

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