Are You Truly Managing Your Energy Risk?

I find it very interesting to learn what the term “Risk Management” means to managing energy within an organization. Most energy managers understand that there are several strategic ways to manage energy risk. But what does this truly mean?

Believe it or not, I come across many scenarios where organizations make strategic decisions regarding energy risk without fully understanding the potential outcomes. As a result, they find themselves in stressful situations where dollars are left on the table or where they are significantly over budget.

Thoroughly understanding your organization’s goals is always my initial recommendation. For example, your CFO may require budget certainty. Often I find that the reaction to this within the organization is to simply procure for a bundled fixed product. This is obviously acceptable, but it’s important to quantify what this means to your entire team.

A bundled fixed product is statistically the most expensive strategy to procure for energy. This is due to the fact that fixing is based upon securing fixed financial positions on forward contract months for an applicable period of time, and statistically the market will settle below the fixed future contact price. So what this demonstrates is that it is more cost effective to float on a variable type product.

I’ve also come across other situations where an organization understands that a variable type approach is more cost effective; however the team does not truly understand their potential exposure with this strategy.

Below are some items to consider when developing your risk management strategy with your ENTIRE team:

  • Fix for budget certainty, rather than attempting to beat the energy market
  • Quantify your exposure based upon several fixing and market fluctuation scenarios
  • Ensure your team thoroughly understands that a market based approach is statistically more cost effective over time
  • Mitigating your risk through a financial process will allow you to capitalize on the monetary benefits resulting from demand management initiatives
  • Understand your load profiles to ensure you are not over-hedging during on/off peak times