Mercatus Energy Advisors works with energy consumers, marketers, traders and processors, to develop, implement and manage energy hedging and risk management policies. While the process varies from one company to the next, the general, initial process is as follows:

I. Identify, Analyze and Quantify Your Energy Risk

Identify all energy-related risks including market, liquidity, operational, credit and regulatory risks. Once all risks are identified, they can be analyzed, categorized and prioritized. Many risks can be rigorously analyzed via quantitative and statistical analysis, while some risks have to be evaluated through a qualitative approach. Risks that are not properly identified and analyzed cannot be effectively managed or mitigated.

II. Determine Tolerance for Risk and Develop Energy Hedging & Risk Management Policy

All risks should be addressed through a process that establishes risk management goals and objectives as well as risk tolerance. An energy hedging and risk management policy can then be developed to formalize the goals, objectives and risk tolerance, and to clearly define the decision-making process and determine who (individuals and/or committees) executes hedging, trading and related activities.

III. Develop Hedging Plans and Execution Strategies

All potential execution strategies should be approved and documented. While the energy hedging and risk management policy addresses the pre-approved boundaries for managing risk, hedging and execution strategies are the detailed steps for implementing the strategies and complying with the hedging and risk management policy.

IV. Implementation

Risk management policies need to be supported by controls and procedures that ensure hedging and trading activities receive an appropriate level of oversight, such as the execution and reporting of trades. Controls and formal procedures can provide transparency that show how risks are being managed, on both a macro and micro level. The controls and procedures can include everything from written procedures to separating front, mid and back office activities to utilizing an energy trading and risk management software system.

V. Execution of Hedging Strategies

Once the previous steps are in place, the execution of energy hedging and trading strategies can begin.  For most companies, execution and management of hedges should be a dynamic process, as opposed to a static process.  As such, hedges should be constantly analyzed and if fits within the company's goals and risk management policy, the positions should be optimized if and/or when market conditions allow.

VI. Monitoring, Analyzing and Reporting Risk

All risks, regardless of whether they are market, liquidity, operational, credit or regulatory, that are being actively managed should be continuously monitored, measured and reported through the company's energy risk management structure. As the company's risk exposure changes, there should be a systematic process for reporting and determining if the hedging policies or strategies need to change or if the existing policy and strategies are correct.

VII. Repeat

While we've only identified six formal steps in the process, the "last" step is the most important: repeating the entire process as often as is necessary, regardless of whether it's as frequent as once a month or as infrequent as annually. 

If you would like to discuss how we can work with you to develop, implement and manage an energy hedging and risk management policy for your company, please contact us.