Physical and Financial Risk Management

A major component of your company’s energy management strategy often includes implementation of physical and financial risk management strategies. The ability to proactively layer or hedge energy purchases for future periods can serve as a powerful physical risk management tool. Hedging portions of your projected energy volumes when commodity markets present strategic buying opportunities allows you to not only maximize your future energy savings, it also adds a proportionate level of budget certainty for a specific period into the future, whether your hedge be short-term (months), mid-term (quarters), or long-term (years). Additional physical risk management tools include but are not limited to triggers, caps and collars, stop loss orders, around the clock energy blocks, fixed price contracts, full requirements contracts, and index price contracts.

Financial risk management refers to the utilization of financial products to limit and manage your exposure to risks associated with future costs of energy. Many firms view financial risk management solutions as insurance policies. In most cases, financial risk management is carefully interwoven with physical risk management strategies to deliver an optimally planned energy risk management solution. Organizations most likely to incorporate financial risk management tend to be those firms that have substantial annual energy expenditures and desire the highest possible level of budget certainty.