Energy and commodity risks

Energy suppliers and traders are exposed to extensive risks, which result in particular from the procurement, distribution and trading of raw materials in the form of energy carriers and certificates. The type and level of risks depend on the individual corporate strategy, for example the type of procurement, the decision on own market access and especially the selection of an optimal opportunity/risk profile. As a minimum, the following tasks should be dealt with as part of the management of the resulting opportunities and risks: 

• Regular review of the trading and hedging strategy as well as the risk management strategy.
• Review of trading and compliance guidelines
• Review of risk management and risk controlling with regard to the MaRisk requirements
• Listing of the main risk drivers
• Derivation of a risk capital concept including an appropriate limit structure
• Determination of the bank's own risk-bearing capacity
• Adjustment of risk ratios and calculation methods to current company 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
• Compliance with market regulatory requirements (including EMIR, REMIT, MAR)
• Valuation, mapping and risk measurement of complex energy products

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-stage process is usually followed: Identification of the relevant exposures
2. Determination of the desired aggregation levels (e.g. region, country, trading point, counterparty, trader, portfolio)
3. Determination of the risk figure 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 method for each risk indicator and exposure (e.g. variance/covariance approach, historical simulation, Monte Carlo simulation)
5. Supplementing the quantifiable values with qualitative factors

In addition to market risks, counterparty risks, fraud risks, regulatory risks, balance sheet risks and operational risks in particular must be taken into account. 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.

KPMG's interdisciplinary teams offer cross-functional and cross-sector advisory expertise for energy and commodity risk management. Shaped 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 company and propose efficient solutions adapted accordingly. We look forward to hearing from you.