How to Think About Risk When Buying Energy

How to Think About Risk When Buying Energy

Risk Spectrum Chart

If your business needs absolute certainty in its energy budget, then the decision is easy—fix as much cost as possible. However, by fixing costs, you are taking market risk off of your plate and asking someone else to take on the risk. As a result, the other entity, usually a supplier or market retailer, has to manage the risk for you, and they will typically charge a premium in exchange. Moving from the left side of the scale (Indexed) to the right side (Fixed) reflects a willingness to pay a higher risk premium to fix a certain level of costs.

The anomaly in the equation is where energy prices are heading versus where they are at now. Many customers will ask, “Where are market prices heading?” Despite all of the market intelligence and reporting, no one truly knows where prices are heading. There are simply too many variables to take into account, which is what makes it a true “market.” More valuable than simply asking where prices are headed is to determine your company’s exposure to the market and what you can do to achieve your budget goals.

Determining where your business fits on the risk spectrum is complex and requires evaluating a lot of factors. Many organizations opt to work with energy advisors to test different scenarios, find the right risk balance, and develop an energy buying plan that takes this into account. That starts with understanding how to approach the market and incorporating the right tools and services to use it to your advantage.

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