Merchant Power: When Hedging and Profits Collide
Does too much risk management mean leaving money on the table?
Why do energy merchants or those utilities with merchant power divisions obsess over “selling” their upside? These companies feel compelled to show steady, predictable profit streams to both the street and their stakeholders, despite the fact that they operate within one of the most volatile markets in the world. Typically, their method of achieving earnings consistency centers on the execution of complicated purchase and sales agreements that effectively lock in the price of fuel and electricity. Don’t these contracts really just eliminate the potential positive return an energy merchant strives to achieve in the first place?
