The energy system is changing rapidly – and so is the electricity market. For market participants, this means they must adapt their operations. The need to strengthen and update risk management led Jönköping Energi to commission Sigholm to revise the company’s risk mandate, following best-practice methods and in line with the new market conditions.
The Important Role of the Risk Mandate
A well-designed risk mandate is anchored in the owners’ and management’s risk appetite and covers various aspects of risk management – including which business units have which mandates, and how risks should be monitored, assessed, and reported. A strong risk mandate is not an obstacle to portfolio management, but rather a support tool and reference document.
The mandate should therefore reflect the company’s characteristics and actual conditions. For example, decision-making powers must be defined so that they are sufficiently broad to allow work to be carried out effectively within reasonable margins. A good risk mandate must also be easy to follow, taking into account market liquidity and the nature of the underlying assets.
New Conditions in the Market and the World
The global energy transition is accelerating rapidly. Renewable energy sources are being deployed at an increasing pace, thanks to sharp declines in component and technology costs that have drastically reduced overall expenses. At the same time, extensive electrification is taking place in many parts of the world.
In Sweden, electricity consumption is also expected to rise, while electricity prices have become significantly more volatile since 2017. The value of flexibility has increased markedly, and what happens closer to delivery is becoming increasingly important. Adapting to these major trends and physical realities requires new working methods, new capabilities – and not least, new risk mandates.
Portfolio Management Reduces Risks and Increases Predictability
Even as the electricity market evolves, some core principles remain constant. One such principle is that a native exposure requires risk management and primarily concerns volume. Conversely, the absence of a native exposure opens the door to speculation and primarily concerns price.
Since the vast majority of participants in the energy and industrial sectors begin with either generation assets, consumption portfolios – or both – they have native exposures. For these participants, the focus lies on volume and the management of existing exposures, forming the foundation for the principles that should guide their portfolio management. Based on quantifiable insights and best-practice approaches, careful strategies can be developed and concretised in a risk mandate.
Strong Alignment and Quantified Market Analysis
Sigholm delivered a risk mandate that was well aligned with the client’s objectives and strategies, and designed to remain relevant in the face of future market developments. As part of the assignment, Sigholm also provided Jönköping Energi’s board and key employees with a thorough presentation of the market and environmental changes underlying the update, and explained how these participants were incorporated into the design of the new risk mandate.
