July 4, 2025 Alex Bannon
How it works: Trading and Risk Management
What is energy trading?
Energy trading involves purchasing electricity and/or gas on the wholesale market for consumption at a future point in time. We typically purchase as much as three years in the future, taking advantage of lower pricing when market conditions permit.
Between now and the delivery of that future contract, several purchases are made to meet clients’ consumption requirements. All trades are made based on minimising cost and managing risk for clients.
Different types of energy contracts explained
Energy contracts fall under two main types: fixed or flexible. With a fixed contract, the price paid for the commodity element of the bill is based on pricing on the day of signature. This means that for fixed contracts, effectively 100% is purchased when entering the contract.
Flexible contracts, on the other hand, do not specify a commodity charge until our Trading team have progressively hedged 100% of the forecasted consumption requirement. From here, the supplier will finalise the rate based on these hedges.
This allows for repeated “dip buying” and protective hedges which often result in a commodity rate that is cheaper than what would have been achieved with a fixed contract.
Please click here for more information on fixed and flex trading.
Understanding risk management in the energy industry
While we are always looking for the best prices to purchase at in the market, it is important to consider the amount of exposure we have with a particular position.
We will consider the risk of prices beginning on a sustained uptrend and ensure that we have purchased enough energy to mean the impact of an unprecedented price hike is minimised. At the same time, we will ensure we leave enough energy left to buy so we can capitalise on drops in price.
For example, if we have six months before we need to reach 100% hedged for a particular period, and heightening geopolitical tensions are causing energy prices to rise, we may opt to bring the hedged level up to 80%. This would largely limit the impact of prices remaining elevated for the coming six months, but leaves enough volume unhedged for us to utilise if prices begin to drop as we get closer to delivery (known as contract decay).
To put a quantified limit to risk exposure, we make use of an upper trigger – this is set at a certain percentage above the market at the point of sign up, and we endeavour to ensure the achieved commodity price does not surpass this level.
Why trading and risk management matters for your business
Since the energy crisis, it has become clear how much of an impact an unexpected global event can have on business energy costs. In August 2022, the peak of the crisis, we saw electricity prices reach levels nearly 10 times higher than what they are today. With an effective risk management strategy, exposure to these kinds of risks can be minimised – all while following a strategy that aims to minimise price.
The importance of an in-house trading team
The UK wholesale energy markets are influenced by a wide array of micro and macroeconomic factors, from domestic wind generation all the way to demand for air conditioning in Asia. This, alongside the ever-increasing influence of geopolitics on energy markets, mean there is a vast amount of research and analysis required to make informed trading decisions.
Having an in-house trading team means that these developments in the market can be actively monitored during every hour that the market is open, and proactive decisions can be made surrounding cost minimisation and risk management in accordance with clients’ specific goals.
To read more about our in-house trading team, read our blog [here].
How can Amber help?
Amber can help your business by supporting you through the full journey. You are in good hands, from the point of enquiry all the way to selecting the best type of procurement and trading strategy to suit your needs.
