How large electricity users can build an effective hedging policy

In today's volatile electricity market, leaving electricity consumption exposed to spot prices creates uncertainty over costs and exposure to price spikes. On the other hand, fixing too much can mean missing lower prices or becoming over-hedged if consumption falls. The right balance depends on company-specific margins, customer contracts, production plans and the need for budget certainty.

“Hedging should always begin with the company’s business objectives. The key question is whether the company wants to reduce risk, improve cost predictability or protect its ability to price its own products. These all affect the overall approach that company should adopt,” says Andreas Bäck, Portfolio Manager, Power at Gasum.

Hedging needs a clear policy

Hedging means fixing the price of part of the company’s expected electricity consumption in advance. This can reduce exposure to sudden price increases and make future costs easier to forecast.

But individual hedging transactions do not yet constitute a strategy. Companies need a clear hedging policy that defines why they hedge, how far into the future they operate and the minimum and maximum share of expected consumption that may be hedged.

A common approach is a so-called staircase model. The proportion hedged is relatively low several years ahead and increases as the delivery period approaches and consumption forecasts become more reliable. This spreads decisions over time instead of concentrating the entire volume at one moment.

The policy should provide direction without becoming too rigid. A longer time horizon can allow the company to act when attractive opportunities arise, while minimum hedging requirements closer to delivery ensure that necessary decisions are not repeatedly postponed.

“A systematic policy is essential. It sets the boundaries for decision-making and helps companies avoid basing hedging decisions solely on short-term market movements. Depending on the business, the hedging horizon may cover several years, typically one to three years, sometimes five,” Bäck says.

There is no single correct hedging ratio

According to Andreas Bäck, companies often ask how much of their electricity consumption should be hedged, but there is no standard percentage that is right for every business.

"A company with stable production and predictable electricity use may be able to hedge a relatively large share of its future consumption. A company whose production volumes vary considerably may need to leave more open to the market," Bäck explains.

Very few companies hedge 100 per cent of their expected electricity use. Keeping part of the portfolio unhedged allows the company to benefit if spot prices fall. It also reduces the risk of becoming over-hedged if production declines, a plant is temporarily shut down or an operational disruption reduces consumption.

“Hedging should follow how the customer’s operations actually develop. Regular dialogue is important because changes in production, maintenance or investment plans can materially affect the appropriate position,” Andreas Bäck says.

How Vargön Alloys manages electricity price risk

For energy-intensive Vargön Alloys, electricity is both a critical resource and a significant cost. See how the company works with Gasum Portfolio Services to manage price risk and support production planning. 

Read the customer story

Hedging prices should be competed

In Sweden, physical electricity delivery and hedging are often purchased from the same supplier. This may appear simple, but it can limit transparency if hedging prices are accepted from only one counterparty.

The exchange provides a useful price benchmark, but its available liquidity may be insufficient for large electricity users. In practice, hedges are therefore often executed bilaterally with market counterparties.

The difference can be particularly relevant in Sweden, where companies may also need to hedge price-area exposure. Liquidity in these products can be lower, increasing the importance of comparing offers.

Gasum’s model allows hedging prices to be requested from several counterparties for each transaction. The customer gains access to several market participants through one interface, while Gasum manages the process and compares the offers.

“Companies often negotiate very carefully over the visible delivery fee but pay less attention to the price achieved in hedging transactions. For a large electricity user, even a small price difference across a substantial volume can have a greater financial impact than the annual delivery fee,” Bäck says.

This arrangement does not require the customer to purchase its physical electricity from Gasum. Gasum can provide portfolio management, market advice and hedging services independently of the company responsible for physical supply. The value of independent portfolio management extends beyond individual transactions. It can also include regular portfolio reviews, market insight, optimisation and broader advice on how the company can respond to both risks and opportunities in the electricity market.

Three principles for better hedging

Large electricity users should base their approach on three principles.

1. First, define the objective before choosing the hedge. The company should decide whether its priority is budget certainty, risk reduction, stable customer pricing or a balance between predictability and market opportunity.
2. Second, use a systematic but flexible hedging policy. Clear time horizons and minimum and maximum hedging levels create discipline while leaving room to respond to changes in prices and consumption.
3. Third, make hedging transparent and competitive. Companies should understand how prices are formed and compare offers from several counterparties rather than relying automatically on one provider.

Good hedging does not guarantee the lowest market price. It gives the company greater control over uncertainty and supports better business decisions.