Energy and Commodity Risks

Energy and Commodity Risk Management

The volatility of energy and commodity prices increases pressure on business entities to identify their resulting risks.

Volatility in energy and commodity prices increases pressure on business entities.

Energy suppliers and traders are exposed to extensive risks, which in particular result from procurement, distribution, and trading of commodities in the form of energy sources and certificates. The type and level of risks depends on the individual company strategy, for example, the type of procurement, the decision on own market access and, in particular, the selection of an optimal opportunity/risk profile. In managing the resulting opportunities and risks, at least the following tasks should be handled:

  • Regular review of the trading and hedging strategy and risk management strategy
  • Review of the trade and compliance policies
  • Review of the risk management and risk controlling with regard to the requirements of MaRisk
  • Listing of key risk drivers
  • Derivation of a venture capital concept, including an appropriate limit structure
  • Determination of own risk-bearing capacity
  • Adaptation of risk ratios and calculation methods to current business entity and market requirements
  • Consideration of market liquidity constraints
  • Optimisation of the IT infrastructure for calculating, monitoring and reporting risk positions
  • Implementation of effective risk controlling, including reporting
  • Meeting market regulatory requirements (including but not limited to EMIR, REMIT, and MAR)
  • Valuation, mapping and risk measurement of complex energy products

Relevant Market Risks in Energy Trading

Market risks represent a significant part of the overall risk of energy supply companies. The main market risks are in the area of market price development, volume and liquidity. For all risks, risk management should specify key figures, calculation methods and frameworks for action, which are monitored by the risk controlling function in the operational business.

  1. To quantify market risk, a multi-step process is usually followed: Identification of relevant exposures
  2. Determination of the desired aggregation levels (e.g. region, country, trading point, counterparty, trader, portfolio)
  3. Determination of the risk indicator per exposure for the defined aggregation levels (e.g. value-at-risk, profit-at-risk, earnings-at-risk, cash flow-at-risk)
  4. Determination of the calculation methodology per risk indicator and exposure (e.g. variance/covariance approach, historical simulation, Monte Carlo simulation)
  5. Addition of qualitative factors to quantifiable values

Other Risk Types and Integrated Risk Management

Counterparty risks, fraud risks, regulatory risks, accounting risks and operational risks must be taken into account in particular, in addition to market risks. Taking into account the interaction of these risks with each other, e.g. when defining stress test scenarios, requires an integrated approach to risk management.

Our consulting offer

KPMG's interdisciplinary teams provide cross-functional and cross-sector advisory expertise for energy and commodity risk management. Characterised by a deep understanding of the wholesale energy markets, their regulatory requirements and the internal interfaces between energy trading and all other corporate units, our specialists advise on both the technical conception and implementation as well as the mapping in IT. In each case, we take into account the opportunity/risk profile of the business entity and propose efficient solutions adapted accordingly. We look forward to hearing from you.

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