Your power supply portfolio and the role of hedging.

• Author: Tudor, David

Last quarter I wrote about "What is Energy Risk Management and Who Needs It?" Now I will address the largest risk of a cooperative power supplier-managing the power supply portfolio. If you are responsible for securing any part of your power supply today or in the future, then you are a power supplier.

Similar to your personal investment portfolio, a power supply portfolio is a collection of transactions designed to meet a specific objective.

Your personal investment portfolio may include cash, bonds, stocks, mutual funds, and real estate. Hopefully, your personal investment plan is based on your personal tolerance towards risk (high risk or low risk investments) and is managed to meet your long-term financial objectives (family needs, college for kids, retirement!).

A power supply portfolio may include purchase power agreements, transmission, generation plants, and fuel to run the plants. Your power supply plan should be based on your cooperative's tolerance towards risk and should be managed to meet its short and long-term power supply objectives.

A power supply portfolio Should be designed to balance the hourly supply needs of a cooperatives load obligations. It's a matter of matching hourly supply with hourly demand. This can be done in ways that are very risky or in ways that carry less risk.

Matching supply with demand for a load serving entity is challenging and requires much more effort than the typical commodity trading firm can provide.

Hold that thought! It becomes very relevant when we talk about where you can get help with your energy portfolio and hedging.

Each individual supply component (purchased power, generation plant, fuel, etc.) made to meet a portion of the cooperative's hourly demand (load obligation) can be considered a hedge. Hedging significantly decreases uncertainty in the overall cost of power to serve the end use consumer. Hedging usually involves both long-term decisions (e.g. power plants, 10 year purchased power) and short-term decisions (e.g. purchase power for the next hour, day, week, month, or year).

So what constitutes the right hedging decisions for your power supply portfolio? Just like there is no one "right" way to invest your money, there is no one "right" way to hedge your power supply portfolio. However, it must start with defining your cooperative's long-term power supply objective and its risk tolerance.

A cooperative's long-term power supply objective determines if the cooperative is more...