An Economist leader discusses how some companies have given up on issuing earning forecasts:
Issuing such targets is pointless and dangerous, critics claim. They argue that, with the banking industry catatonic and consumers pulling their purse strings ever tighter, the world is so topsy-turvy that any financial goal will be out of date as soon as the ink dries on the press release.
Perhaps the answer lies in new ways of forecasting:
The same approach is needed for energy. UK Gas and electricity, following the lead of oil, are among the most volatile commodities going. The price today is based on today's news. Tomorrow? The news changes, sometimes fast, sometimes slow, sometimes it does actually just sit there. NHO has always recommended using Day Ahead Gas and Electricity Index prices, where final commodity cost each month is derived from average wholesale prices that change daily. Commodity costs are up to 95% of a delivered price and transportation and margin costs are the only things that are mostly fixed. If margin increased from 2% to 3%, or transport went up even 10%, the overall price outturn is barely changed.
But while an increasing amount of energy buyers are happy with that approach, FD's or Account Departments like to have figures to put in their spreadsheets. FD's have a right to numbers, but they are adult enough to know that as Voltaire said "Doubt is uncomfortable, certainty is ridiculous". The solution could be scenario planning based on dynamic forecasting, where prices for quarters, seasons and years would be provided- and inevitably change – on a regular basis. That may be uncomfortable for less nimble companies, but the old way of fixed prices has gone – and it won't be back.
Smart Metering enable users to know exactly what they are using on a daily and monthly basis. Today, problems arise in that Smart Metering still runs up against stupid tariffs based on the old paradigms of meter reads so infrequent and random that suppliers guess what movements prices would take. When presented with risk, they inevitably erred on the side of caution and we had the old model of utility pricing. Things aren't so sure anywhere, anyhow, anymore. But they will be far cheaper, and companies need to cut every cost going to survive. Floating price insecurity, or the security of having to lay someone off to pay a fixed price energy bill. The choice may be yours. It may be your job.
If end users seek certainty, someone will take their money. We aim to provide the numbers and how to interpret them. The rest is up to our readers. We're not in the crystal ball business. Or any type of cross the palm with silver business.
No end user of any size is going to have any impact at all on energy prices, apart from tiny levels of margin, which depends mostly on the credit score anyway. The common fallacy that volume means anything in energy is not believed by most people. That includes energy consultants, although they have a vested interest in saying otherwise. The commodity cost is the same for a chip shop, data centre, bakery, car plant, steel mill or even a power station.
All end-users can do is to be aware. That's where we try to educate buyers and users alike. Forecasts will always be necessary. Smart Metering. Smart Prices. Smart Forecasting. That's the core NHO product, coming to an inbox near you soon.