Operational challenges

In today's crisis-ridden global economy, it is not only traditional energy-intensive companies that are increasingly confronted with volatile energy prices. What could be more obvious than to assign an additional task to Corporate Treasury, which is usually responsible for managing financial risks and ensuring the financial stability of the company as well as the associated reporting, in addition to other central tasks. In addition to the specific challenges that arise in the operational management of energy price risks with derivative instruments, treasury is also faced with additional tasks in managing the effects on balance sheet and controlling figures.

One of the special features of these instruments for Corporate Treasury is that the derivative financial instruments used for the risk management of energy prices, e.g. physically settled standard trading instruments on electricity, gas or oil products, are often concluded in Treasury, but the underlying risks are managed in other parts of the company, such as Procurement or Logistics, and sometimes even in separate commodity trading departments. Therefore, for appropriate risk assessment and management as well as the associated internal and external reporting, the underlying data from the areas involved must be localized, interpreted, collected, quality-assured, transformed, harmonized, processed and also aggregated and reported in a suitable manner as automatically as possible.

The assessment of energy prices and their volatility is the necessary basis for managing risks, but it is also one of the most complex challenges in the area of risk management. This complexity arises from the large number of factors that influence price trends and the dynamic nature of the energy markets. However, a precise forecast of price and volatility trends is crucial for targeted strategic planning and risk management in energy-intensive companies.

Forecasting energy price trends is particularly challenging, as the relevant factors are often difficult to predict and have been affected by severe shocks, particularly in the recent past. In the recent past, these include the Ukraine crisis, customs uncertainty and political developments in the Middle East. Traditional statistical models such as ARIMA (AutoRegressive Integrated Moving Average) and GARCH (Generalized Autoregressive Conditional Heteroskedasticity) are widely used to model the volatility of energy prices. According to current literature, these models provide a solid basis for analyzing historical price data and identifying trends. However, they are reaching their limits in today's highly volatile markets, as they are often unable to adequately account for sudden market changes or unforeseen events. More modern models use big data and AI, especially machine learning, to improve forecasting accuracy and manage complexity through comprehensive data analysis. However, such models are typically more common in companies for which energy trading is a core competence than in the energy-intensive industry and the responsible treasury.

In corporate practice, energy price risks are hedged using derivatives such as forwards, futures, options and swaps. The fact that these types of contracts are mostly used in the company's treasury department to hedge interest rate and currency risks is one of the main reasons why the instruments are concluded and reported by the treasury department and not by other departments. As a result, the treasury department has an important task in managing and reporting energy price risks without being able to determine the exact extent of the risks on the basis of its own data.

In addition to the relevant price developments on the energy markets, determining the risk exposure to be hedged is a key component of successful risk management. Risk exposure is the basis for measuring the potential financial impact of price changes on the company's relevant key performance indicators. It is typically defined and measured in units of the underlying traded commodity or in monetary units. In order to determine the risk exposure, companies must carry out a comprehensive analysis of their energy consumption patterns and their dependence on certain energy commodities and at the same time take into account the theoretical as well as the actual possibility of passing on these cost components in their sales contracts. The assessment of risk exposure therefore requires close cooperation between the departments involved, including sales, purchasing, production, logistics and finance. The departments usually operate in different IT systems, whose data must be merged in order to obtain an analysis of the company's planning requirements and volume risks. Only by accurately and regularly quantifying risk exposure can companies develop, implement and backtest appropriate hedging strategies that are tailored to their specific needs and risks.

In addition to their expected economic effect, the use of derivatives for hedging purposes can have a direct impact on a company's balance sheet. These instruments must be accounted for in accordance with the applicable accounting standards, which can directly influence the external presentation of the company's most relevant key figures. Under IFRS 9, stand-alone derivative financial instruments must be recognized in the balance sheet as a financial asset or financial liability and assigned to the fair value through profit and loss category. Especially in the case of very long-term hedging instruments in conjunction with strong market price movements, this can lead to considerable undesirable effects on the balance sheet and on earnings. In order to avoid adverse effects on earnings in particular, hedge accounting is often used in accordance with IFRS. When applying hedge accounting, the ineffective amount of the hedging relationship must be determined. Measuring and reporting this ineffectiveness is subsequently also the responsibility of the treasury department, which, depending on the scope of the hedging activities, involves considerable operational burdens for data procurement, quality assurance, mandatory calculations and documentation.

In addition to its influence on external reporting, hedging with derivatives also has an impact on important controlling indicators that are used to manage and evaluate the company's success. The use of derivatives to hedge energy price risks has a significant effect on hedging margins, particularly for energy-intensive companies. However, when calculating the margin in detail, it is important to take into account that the effects should be allocated to the individual business units and cost units in line with their causation. This significantly increases the complexity of centralized hedging when purchasing electricity and gas due to their considerable short-term price fluctuations, especially in large companies with their different business models. However, the associated transparency regarding the actual costs and therefore the margin of the individual business units is a key success factor for most companies, especially in the current highly competitive market environment, and should therefore be taken into account when planning derivative hedging against energy price risks.

The management of energy price risks by Corporate Treasury is a complex, interdisciplinary task that requires a coordinated approach. Only through a combination of intelligent project planning, the stable and permanent consolidation and use of existing data and goal-oriented interdisciplinary cooperation can the treasury department manage energy price risks effectively and resource-efficiently, while at the same time making a significant positive contribution to the company's financial stability and, moreover, to cost transparency based on causation.

Source: KPMG Corporate Treasury News, Issue 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