Strategic Energy Risk Management for End Users

Abstract

Strategic energy risk management may be defined as the development of a systematic method to analyze exposure to various components of risk and managing it in the context of a company's predetermined financial objectives and risk tolerances. A strategic energy risk management (SRM) program is essential for industries with significant energy exposure and limited market pricing power. A successful SRM must consider gross margin at risk within tolerance levels by product line, cash flow at risk within tolerance levels by business unit, energy cost at risk within tolerance levels by location, and earnings at risk within tolerance limits at the corporate level. Such a program is contingent on determining stochastic optimal hedge strategies based on risk tolerance, detailed price and usage patterns across locations, current energy market conditions, and some input regarding the company's market pricing power. Even when market conditions handicap a company's ability to implement such a program fully, a layering strategy can be effective.