Pricing techniques used in the cloud computing and electricity markets

I’m four months into my “life in the cloud”, having left Shell’s power trading desk to become Strategic Blue’s Head of Pricing & Portfolio Management. I thought it was a good time to share what I’ve learned so far, and the similarities I’ve discovered between the pricing techniques used in the electricity and cloud markets. For example, the hedging techniques used to manage your electricity usage can also be applied to managing cloud usage.

It’s well known that there are some strong parallels that can be drawn between cloud computing and electricity markets. We outlined this in 2018 in a paper I collaborated on with friends, colleagues and ex-colleagues from Morgan Stanley, Strategic Blue and Oxford University.

Cloud Computing vs Electricity Market Pricing

Here at Strategic Blue, we are developing our approaches to cloud retail product pricing to offer compelling cloud price and volume risk management products to our customers. This is similar to the pricing activity carried out in an electricity retailer to offer electricity price and volume risk management products to consumers. 

With electricity, you hedge price risk using electricity physical forward contracts that can be purchased for different time horizons into the future. There are even products available with different within-day delivery profiles. The idea of purchasing forward is that a customer gains price certainty for the volume they forecast they’ll need. This avoids the volatility and risk of high electricity price spikes.

With cloud (for example, AWS) there are financial forward products that can be purchased, to lock-in price and gain certainty for an amount of forecasted cloud usage. The equivalent of the day-ahead and within-day markets for cloud is the “on-demand” price, which is high but with lower volatility than for electricity. Cloud forward products often offer compelling discounts relative to on-demand prices when a customer commits to a set amount of usage for one or three years. 

Electricity can have strong seasonality in demand related to time of day, day of week, and month of year patterns as well as correlations to weather variables. Seasonality patterns in cloud demand do exist, but they are different in nature, and hard to predict on a customer-by-customer basis. However, clearer trends will become apparent when looking at a portfolio of customers. 

While electricity is (usually) one single artificially-fungible wholesale product in its local market, cloud vendors sell different types of cloud products (e.g. compute, storage, database services) for use in each region. For AWS Elastic Cloud Compute (EC2), the forward products (such as Reserved Instances & Savings Plans) vary depending on size, location, operating system and whether they are optimised for memory, network or storage features. 

You can purchase standard Reserved Instances to hedge a particular EC2 service, buy convertible Reserved Instances with options that enable you to convert the hedge to cover a different cloud usage type if usage changes. Or you can buy Savings Plans that will hedge spend across a portfolio of different cloud usage types and apply to the largest discount in the portfolio first (and so behaves like a look-back option). These products have different advantages and disadvantages in terms of price and flexibility so selection will depend on what you want to achieve.

How Strategic Blue’s Pricing Works

Strategic Blue has many years of experience in deal structuring and trading in commodities markets and has blended this with our cloud and technology expertise to offer something different. We assist in the management of cloud complexity for our customers in order to help achieve a better balance between lower cloud spend and technical flexibility.  The aim is to better align the financial deal to suit each customer’s current and future cloud needs. 

We guarantee to price products to our customers that lower their spend by more than is achievable directly via cloud vendors. We help our customers understand their cloud usage and determine the right level of hedging to manage their cloud costs. Thanks to our portfolio approach, we can offer tailored payment arrangements and commitment lengths that aren’t available directly from the cloud vendors. This means that customers can benefit from forward commitment discounts that best fit with their business planning or cloud migration timings. We have a range of engagement models to suit different customer needs and work with companies across many sectors, both private and public.

If you would like to lower your cloud spend, and think you have cloud usage that would benefit from our tailored, yet guaranteed cheaper-than-direct products, get in touch today!