What is an Energy SWAP?

Our April webinar explained the different types of energy SWAPs and discussed points to consider when engaging in this free market operation

One of the advantages of the free energy market is the freedom both special and free consumers have to negotiate conditions when they buy or sell energy to meet their needs. As an example, in the free market consumers can use energy SWAPs, that is, exchange energy with other players.

The term SWAP is well-known in investment markets, and it is defined as any type of exchange between two parties.

In the free energy market, we have different types of SWAPs power consumers may consider, analyze and then carry out when such operations make business sense. The options available are Power Source SWAP, Submarket SWAP and Period and Volume SWAP.

Any of the three forms of SWAP can be chosen by special consumers – contracted demand from 500kW to 3000kW – and free consumers – contracted demand above 3000kW.

This month’s webinar provided more information on each type of SWAP, with real-life case examples that help consumers understand the best time for a SWAP operation.

Power Source SWAP

Power Source SWAP operations are available for both free and special consumers, but there are differences between them: special consumers can only buy power from incentivized sources, and therefore can only exchange one incentivized source for another.  Free consumers, on the other hand, can swap all kinds of sources.

There are two ways to perform this energy SWAP. In the first scenario, consumers negotiate directly with their energy supplier to change their power source, provided the supplier has different options.

If their current supplier has no other source to offer, a third-party supplier may be involved in the exchange agreement. In this case, the consumer must transfer the original contract and enter a new agreement with the chosen source.

To identify a good opportunity to make this type of power SWAP, consumers must analyze the so-called ‘cost of wire’, or Charge for the Use of the Distribution System (TUSD), which is the amount the distributor charges for the use of the grid to ensure their energy consumption.

The next step is to assess existing spreads in energy prices. What does that mean?  Consumers should calculate the difference between the price of the energy they are currently buying and the price charged for energy from other sources, for example, comparing the price for energy from conventional sources vs. 50% incentivized energy.

When the difference between them (spread) is greater than the cost of wire at the 50% discount for incentivized sources, it is advantageous for consumers to waive the discounted distribution charge and buy power from conventional sources, for example.

If the spread is less than the cost of wire at 50% discount, consumers stand to profit from the discounted TUSD, so it makes sense to switch from conventional energy to 50% incentivized sources. The image below shows the calculation:

Source: Comerc Energia

 

Crunching the numbers and analyzing different scenarios can help consumers decide whether a SWAP will actually bring savings and be beneficial to the business.  Some important points to consider in a SWAP:

  • Analyze the conditions when transferring a contract with an incentivized energy source: consumers may lose their discounted TUSD.
  • Consumers can always carry out a SWAP. All it takes is to calculate the relation between spread and distribution charges (cost of wire)
  • SWAP operations will impact cash flow (positively or negatively);
  • It is important to evaluate possible taxation issues.

 

Comerc Explains – Webinar

Our webinar “SWAP: learn how to use this strategy to create opportunities” also brought examples of submarket SWAPs and Period and Volume SWAPs.

Our experts Danilo Mello from Comerc Trading and Tiago Boralli from Comerc Gestão outlined the different types of  SWAP and pointed out the importance of good energy management to identify the best opportunities for cost savings in the free market.

Feel free to ask questions or offer comments here.

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