Energy Trading & Risk Management

Good governance and efficient operation are the key to success in energy wholesale markets. ESP Consulting supports vertically integrated utilities, merchant generators, suppliers, aggregators, and asset-light traders to achieve best practice in their energy trading and risk management activities. We have particular expertise in managing and optimising volume uncertainty and flexibility. Our experience covers trading of all energy commodities (including certificates and emissions), power generation (thermal, CHP, hydro, nuclear, and renewable), upstream and midstream gas, and customer supply of electricity and gas.

Our key services include:

Risk Governance, Policy and Controls

We design appropriate risk governance structures that facilitate commercial decision-making combined with operational control by management and shareholders. This includes:

  • Setup of the risk organisation at both the group and business unit level (including interfaces and reporting lines);
  • Specification of detailed roles and responsibilities covering risk committees, risk management and commercial functions, specialist corporate functions, internal audit, and the business units;
  • Development of risk policies and supporting procedures and operational manuals covering market, credit and liquidity as well as operational and wider business risks;
  • Management of specific risks such as treasury, financial regulation, environmental policy, etc.; and
  • Definition and development of risk reporting from Board level risk dashboards to daily and real time operational reports for traders and risk managers.
Risk Analytics and Modelling

We develop, calibrate, or validate models to measure and report market and credit risks, as well as cashflow uncertainty stemming from cash margining, including:

  • Standard metrics for trading portfolios for market risks (e.g. parametric and Monte Carlo VaR) and credit risks (e.g. potential future exposure, expected credit loss);
  • Models that recognise market illiquidity and assume positions are held open and optimised to delivery (e.g. Profit-at-Risk, Earnings-at-Risk, or Cashflow-at-Risk);
  • Models which do not rely on standard pricing assumptions such as lognormality, and which are capable of handling irregular price behaviour such as jumps and spikes; and
  • Models that consider physical assets and volumetric uncertainty.
Diagnostic Reviews
We review an organisation’s risk management and commercial practices on behalf of Risk Management Committees, internal audit, and shareholders. Our analysis is informed by up-to-date and in-depth understanding of regulation and best industry practices. We provide a clear report with our findings together with practical and actionable recommendations for improvement.
Transaction Review and Contractual Assurance

We support investments, acquisitions, and divestments by reviewing valuations, contractual terms, and associated transaction risks. Our services include:

  • Valuation of contracts or assets in the context of sales, auctions, or internal performance measurement, including model validation, and review of assumptions;
  • Valuation modelling with complex optimisation of flexibility, real options, variable weather effects, and other stochastic effects;
  • Assessment of operational, regulatory, market, credit, and other transaction risks; and
  • Acting as an expert witness and supporting Monitoring Trustees for auctions.
© ESP Consulting Ltd, 2020. ESP Consulting is a registered European trademark.