Profit at risk
What is profit at risk?
This is a risk management strategy used in energy trading. The exact way it's calculated varies between different firms, but it usually considers both price risk and volume risk.
Where have you heard about profit at risk?
It was first used by a Norwegian firm called Norsk Hydro, as part of its efforts to prepare for the deregulation of the electricity market. It's since been adopted by other energy firms as a way of protecting their earnings.
What you need to know about profit at risk.
It's not to be confused with profit risk, a risk management tool mainly used in the financial services industry. Profit at risk helps companies measure downside risk to profitability of a portfolio of both physical and financial assets. This is then analysed over a specific time period during which its energy will be delivered. Factors that must be taken into account when calculating profit at risk include uncertainty in electricity generation volumes, and changes in consumer demand.