Risk Management
Gas and electricity are volatile and challenging markets, and it is crucial to successful
procurement that you implement and operate a rigid risk management strategy that works with
your organisation's objectives to manage both market and volume related risks.
There are a number of methodologies for price protection within a flexible product which
can be employed, inclusive of financial instruments such as a cap and collar, and risk
management mechanisms such as Value at Risk (VaR) and Capital at Risk (CaR).
Our suggested procurement strategy for both gas and electricity would be based around the desire
to achieve the following core features:
- Diversification – multiple purchase points for each period increases the opportunity of
achieving "fair" market value
- Judgement – incorporating the ability to purchase if/when "good" prices are perceived.
- Control – implementation of a rigid risk limit which forces purchases to be made if certain
predetermined limits are hit and mitigates the potential for prices to breach set budgets.
The principles have worked very successfully with many of our clients on flexible purchasing
solutions, who have successfully hedged out proportions of volume in advance of delivery to protect
against price spikes.
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