Active Hedging: Striking a Balance Between Cost Reduction & Risk Mitigation

Most commercial energy buyers are familiar with fixed-price energy contracts. Although it’s the more common method of energy procurement, it may not be the best strategy for every situation or organization.

Energy prices fluctuate all the time. While energy prices can trend higher or lower based on market fundamentals, they also fluctuate within a longer term trend. These intra-trend market movements provide potential buying opportunities. Rather than trying to time the market to fix your energy price all at once, you can execute a procurement plan that allows you to take advantage of future buying opportunities without fully exposing yourself to price risk.

This procurement strategy is typically referred to as a ‘block and index’ or a ‘managed’ product. Purchasing portions of energy  over time will mitigate energy price fluctuations that come from being “all in” with a 100% fixed supply contract or a 100% index contract. This strategy strikes a balance between establishing budget certainty and managing energy purchases to drive costs down.

Key Features of Hedging:

  • Transparency of costs
  • Ability to take advantage of market dips while limiting budget risk
  • Conversion to a fixed price at any time

As a Usource client in an active hedging contract, our advisors would work with you to develop a procurement plan based on your specific risk tolerance and budget objectives. We would then monitor the market for you to ensure hedging decisions were made at the appropriate times and volumes. Find out if an active hedging strategy is right for your business, contact your energy advisor or email us a myadvisor@usourceenergy.com.


About the Author

Tom Dyer is Sr. Director, Procurement & Analysis for Usource. Tom has over 16 years of experience in the energy markets, including working for two of the largest energy suppliers on the East Coast.

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