Utilities and other significant energy players have many choices when hedging energy needs in wholesale markets. For example, players can choose from highly specialized, but less efficiently priced, full requirements contracts to more standard, and efficiently priced, forward contracts. We support the structuring and analysis of hedging strategies using a full range of market products including options.  Numerous hedging strategies are considered, from strategies that minimize risk at all costs, to more advanced methods that incorporate a desired risk profile and embedded flexibilities.

For firms buying and selling less liquid products, we have developed a framework, with accompanying tools, based on internal energy market models that incorporate risk into the pricing of contracts. The methods we use can be extended to hedge environmental risks through the purchase and sales of emissions permits as well as transmission congestion and weather risks.

Our experience in physical and financial hedging includes:

• Evaluated the risk-return trade-off of purchasing full requirements contracts to purchasing structured packages of standard forward contracts for IOU’s and municipal utilities lacking generation capacity. Recommended specific hedging strategies based on standard forward contracts, which led to more efficiently priced retail contracts.
• Developing a framework for regulators and regulated utility distribution companies to evaluate procurement plans. The framework is based on methodologies we have developed to evaluate hedging strategies and can be used to guide rate case negotiations.
• Developed a comprehensive hedging and portfolio management strategy for a large regional utility as described in more detail in the case study of portfolio management.