Hedging Strategies: Balancing Cost Reduction with Risk Mitigation

Hedging Strategies: Balancing Cost Reduction with Risk Mitigation

Most commercial and industrial energy buyers are familiar with fixed-price energy contracts. Although this is the more common energy procurement method, it is not always the best strategy for every situation or organization.  There are multiple approaches to developing the energy strategy that best meets your organization’s unique business needs and sustainability goals, and each carries a different type of risk. 

Energy market pricing is continually fluctuating. While energy prices do trend higher or lower based on market fundamentals, they also fluctuate within a longer-term trend. These intra-trend market movements can be potential buying opportunities.

Block and Index Strategy

Rather than trying to time the market to fix an energy price all at once, it may make sense to execute a procurement plan that allows you to take advantage of future buying opportunities without fully exposing your organization to price risk.

This procurement strategy is typically referred to as a ‘block and index’ or a ‘managed’ product. Purchasing portions of energy over time will mitigate energy price fluctuations that come from being “all in” with a 100% fixed supply contract or a 100% index contract. This strategy strikes a balance between establishing budget certainty and managing energy purchases to drive energy cost reduction.

Key Features of Hedging Strategies:

  • Transparency of energy costs
  • Take advantage of market dips while limiting budget risk
  • Conversion to a fixed price at any time

Is a Hedging Strategy Right for My Organization?

As a Premier Power Solutions client in an active hedging contract, our advisors can work with you to develop a procurement plan based on your specific risk tolerance and budget objectives. We would then monitor the market for you to ensure hedging decisions were made at the appropriate times and volumes.

There are many approaches to buying energy, and each organization’s energy needs and sustainability goals are unique. To learn more about energy procurement best practices, download our white paper.

To find out if an active hedging strategy is right for your business, please contact us to talk about your current and future energy and budgetary goals. Our experienced energy analysts and advisors are here to help you develop your customized corporate energy strategy.