Operational Challenges

In today’s crisis-driven global economy, volatile energy prices are no longer an issue only for traditionally energy-intensive companies. Against this backdrop, it makes sense to assign an expanded role to Corporate Treasury. Beyond its key responsibilities – such as managing financial risks, safeguarding the company’s financial stability and ensuring proper reporting – Treasury is now increasingly expected to take on the management of energy price risks. But adding this responsibility is not without challenges. Treasury must not only deal with the specifics of using derivative instruments to manage energy risks, it must also manage the impact of those activities on balance sheet metrics and performance indicators.

One characteristic of energy price risk management is that the derivatives used – such as physically settled standard contracts for electricity, gas or oil products – are often executed by Treasury. Yet, the underlying risks are usually managed elsewhere in the business, for instance in Procurement, Logistics or even specialized commodity trading divisions. This creates a coordination challenge. To ensure meaningful risk assessment, proper hedging and reliable internal and external reporting, Treasury must be able to source, interpret, capture, validate, transform, harmonize and process data from across the business – ideally through automated processes. The data must then be aggregated and reported in a way that supports decision-making.

Understanding energy price trends and volatility is the foundation of risk management. At the same time, it is one of the most complex challenges. Energy prices are influenced by a wide range of interdependent factors, and energy markets are inherently dynamic. Accurate forecasts of price developments and volatility are therefore critical for strategic planning and risk management in energy-intensive businesses.

This type of forecasting is especially demanding, since many influencing factors are difficult to predict and, in recent years, have been shaped by severe shocks. Examples include the war in Ukraine, trade tariff uncertainties as well as political tensions in the Middle East. Classical statistical models such as ARIMA (AutoRegressive Integrated Moving Average) and GARCH (Generalized Autoregressive Conditional Heteroskedasticity) are widely used to model energy price volatility. According to the literature, they provide a robust foundation for analyzing historical data and identifying trends. However, in today’s highly volatile markets, these models can fall short because they struggle to incorporate sudden market shocks or unforeseen events. More advanced approaches leverage Big Data and artificial intelligence, particularly machine learning, to enhance forecast accuracy and manage complexity by analyzing vast datasets. Still, such models are more commonly found in companies where energy trading is a core competency than in energy-intensive corporates and their Treasuries.

In practice, companies hedge energy price risks with derivatives such as forwards, futures, options and swaps. Since Treasury already manages similar instruments for interest rate and currency exposures, it is usually the part of the organization executing and reporting these transactions. As a result, Treasury plays a central role in steering and reporting on energy price risk – even though it often lacks direct access to the underlying data that define the company’s exposures in detail.

Alongside analyzing market prices, determining the exposure that needs to be hedged is a key element of risk management. Exposure measurement forms the basis for identifying the potential financial impact of price changes on key management metrics. Typically, exposure is defined and measured either in units of the underlying commodity or in monetary terms. To quantify exposure, companies need an in-depth understanding of their energy consumption patterns and dependencies on specific energy sources. They must also evaluate to what extent they can pass on energy-related costs to customers through contractual arrangements, both in theory and in practice. This exercise requires close collaboration across multiple functions, including Sales, Procurement, Production, Logistics and Finance. Each function operates in its own IT landscape, making it necessary to consolidate data so as to create a unified view of projected volumes and risks. Only by precisely and regularly measuring exposure can companies design, implement and backtest hedging strategies that align with their specific risk profile.

The use of derivatives for hedging not only results in economic benefits, it also affects financial statements. Under IFRS and other accounting standards, these instruments must be recognized on the balance sheet, which directly influences how key financial indicators are presented to the public. Standalone derivative contracts are recorded under IFRS 9 as either financial assets or financial liabilities and measured at fair value through profit and loss. In the case of long-dated hedges combined with major price moves, this can result in sizable and often unwanted balance sheet and income statement effects. To mitigate these effects, many companies apply hedge accounting under IFRS. This requires Treasury to measure and report on hedge ineffectiveness for each relationship. Depending on the scale of hedging activity, this can add a substantial workload in terms of data collection, quality assurance, calculations and documentation.

Hedging energy price risks with derivatives also affects internal performance metrics. For energy-intensive companies, these effects are particularly relevant in the context of margin protection. However, margin calculation is not straightforward. The economic effects of hedging need to be allocated to individual business units and, in some cases, down to individual cost centers. This can become highly complex in large organizations with different business models, especially when dealing with the significant short-term price fluctuations seen in electricity and gas markets. Nevertheless, ensuring transparency around actual costs and margins across all business units is a critical success factor in today’s competitive environment. That’s why companies should incorporate margin impact into their planning when setting up hedge programs for energy risks.

Managing energy price risks through Corporate Treasury is a complex, interdisciplinary challenge. Success requires a coordinated approach that combines smart project planning, robust and permanent integration of relevant data as well as targeted cross-functional collaboration. Done well, Treasury can not only manage energy risks effectively and efficiently but also make a valuable contribution to financial stability and to the transparency of cost and margin structures across the company.

Source: KPMG Corporate Treasury News, Edition 157, August 2025
Authors:
Ralph Schilling, CFA, Partner, Head of Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG
Bardia Nadjmabadi, Senior Manager, Finance and Treasury Management, Treasury Accounting & Commodity Trading, KPMG AG