Risk indicators for managing the energy procurement process

Abstract

Purpose

Energy commodities are characterised by rigid demand and high price volatility, linked to many variables such as climate factors, exchange rates, availability of resources. At the same time, the authorities often set prices, so wholesale energy companies need to create margins carefully by managing the procurement process and selecting appropriate tools to manage the risks associated with the volatility of energy prices. The purpose of this paper is to analyse and evaluate price and volume risks in the energy procurement process considering a “non-speculative” point of view, which is understudied in the literature review.

Design/methodology/approach

The paper adopts a quantitative approach to risk evaluation, based on accounting indicators, and applies it to a large Italian energy wholesale company.

Findings

A set of key risk indicators to measure price and volume risks is presented in the results, split into synthesis risk, unbalanced risks, modulation risks and risks derived from bilateral contracts. These indicators are applied to the case study, and each risk is prioritised and discussed.

Originality/value

This contribution is one of the first attempts to analyse energy procurement risks in a non-speculative approach. The proposed method allows: first, to evaluate and prioritise the three major types in the energy procurement process, second, to observe the trend of risk exposure, third, the performance measurement of the procurement process, and fourth, benchmarking activities if widely implemented in the energy sector.

Citation

Verbano, C. and Crema, M. (2015), "Risk indicators for managing the energy procurement process", International Journal of Productivity and Performance Management, Vol. 64 No. 2, pp. 228-242. https://doi.org/10.1108/IJPPM-06-2013-0102