Hansel’s innovation label awarded to Government electricity price hedging
One of the criteria of an innovation is the novelty of the solutions procured for the customer and the market, and the impact on the contracting entity.
Everyone has been talking about the price of electricity over the last year. Hansel has published several invitations to tender regarding electricity, but tendering cannot influence everything. Most of the price of electricity is set by the electricity market, and not even we can escape the market price of electricity.
The only way to control the market price is to hedge the electricity price in advance. Fortunately, Hansel had a ready-made solution for the hedging of electricity prices – a portfolio manager selected through competitive tendering. But how can you get the best out of your portfolio manager? From the starting point described above, we set out to develop our electricity price hedging so that the portfolio manager would have the highest possible motivation to hedge the electricity at the lowest possible cost. Naturally, the solution still had to comply with the Act on Public Procurement and Concession Contracts.
Saving tax money
After several trial runs, a solution emerged: the volume of electricity purchased by the Government was high enough to be distributed between two portfolio managers. We decided to put two portfolio managers in competition against each other for the first couple of years of the contract period and then exercise our option for the final years of the contract period with the better performing portfolio manager. The portfolio manager that had been able to hedge the electricity price from market fluctuations to a more affordable level would naturally be the better performing one.
The solution we developed met the strict sustainability analysis screening criteria for the Hansel innovation label. We are certainly not the first in the world to make two portfolio managers compete against each other, but as far as we know, the Finnish model is not very widely used, at least in public procurement. On the positive side, the solution has the potential to result in cheaper electricity prices, which will save the taxpayers’ money. Ultimately, successful hedging of electricity prices has the potential to save many times the amount of money that could be saved arranging a competitive bidding.