NEWS

Direct and indirect energy margins

17.10.2019 | Author: Ilse Melotte

At NrgFin we have two ways to look at energy suppliers’ Gross Margins.
On the one hand we measure Customer Profitability, Segment Profitability and Company Profitability

The latter being an aggregation of underling Revenues and COGS that we calculate at the lowest level. Retail businesses typically want to segment end customers as different customer types drive opex in a different way.

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Another and probably better way to look at Gross Margins is more related to the business’ vertical integration and whether the energy supplier is a pure retailer or not.

Wholesale and retail sales of energy (also called upstream and downstream) are different business domains with different processes, which are governed by other market rules. Often the wholesale P&L is settled based on market allocation and the financial reconciliation risks are carried by the retailer. However alternative terms could be contracted. When following this business organization, an accurate way to look at the Company Gross Margins is to split it between Direct and Indirect Margins.

At NrgFin we like to speak in terms of maturity, as it brings clarity during customer meetings. Our Gross Margin functionalities provide analytical views on end customer revenues and COGS over the unsettled market periods. The maturity model has 3 development stages when analyzing Gross Margins:

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Defined Stage

In this first level, the Company Gross Margin equals Delivered Margin, which is the difference between end customer Sales and COGS.

Managed Stage

In a more mature stage the energy supplier considers Direct Margins and Portfolio Margins:

  • Direct Margin is the margin realized by sales on top of the Sales Cost of Energy (SCOE). It includes discounts, commissions and subscriptions.
  • Portfolio Margin is the difference between the Sales Cost of Energy (SCOE) and the Bought Cost of Energy (BCOE). It represents the part of the Delivered Margin that is not explained by the Direct Margin. By difference, it represents the margin effects that should be managed by the Sourcing and/or Risk department.

Optimized Stage

The most mature suppliers understand that there is a third element playing: the Indirect Margin. Therefor definitions are:

  • Direct Margin is the margin realized by sales on top of the Sales Cost of Energy (SCOE). It includes discounts, commissions and subscriptions.
  • Indirect Margin is the difference between the SCOE and the BCOE, in which the BCOE is the additional cost the customer would have if he was added to the portfolio without taking into account additional portfolio synergies. It is the marginal additional cost of a customer to the total procurement cost without portfolio effects. It includes the risk premiums for uncertain events in the future, such as the Imbalance risk premium, the profiling cost premium, the transaction costs (fees...)
  • Portfolio Margin is the part of the delivered margin that is not explained by the Direct Margin or the Indirect Margin. By difference it represents the margin effects that should be controlled and analyzed by the Sourcing and/or Risk department.

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