THE INFLUENCE OF RISK MANAGEMENT THEORIES ON THE USE OF DERIVATIVES IN THE ELECTRIC POWER INDUSTRY

Abstract

The work explores crucial decisions on the use of the specific types of derivatives in the electricity price risk management by the member companies of the European Federation of Energy Traders (EFET). The survey has been motivated by volatile fuel prices on international markets and significant losses incurred due to the exposure of companies to such volatility. These trends are the reason why increasing attention is devoted to risk management in the energy sector. The work tests the validity of the assumptions relating to the justification of the risk management function and its impact on corporate value increase. It has been investigated if these theories, as well as the specific corporate characteristics, such as indebtedness, size, liquidity and investment value, influence the use of forwards, futures, options or swaps as tools designed to offset the risk of energy price changes. The findings of univariant and multivariant analyses have shown that the companies using forwards differ from the companies not using them due to their greater indebtedness and higher value of new investments. It can thus be concluded that the companies which are more engaged in capital investment and in this use higher amounts of bonded capital tend to use forwards to a greater extent. On the other hand, it is interesting to note the fact that the size of a company does not play a major role in the choice of this tool, which confirms that forwards are a risk protection tool in the broadest use among big and small companies alike. Likewise, it is indicative that the size of a company has proved to be an influential factor in the choice of futures, swaps and options as tools created to offset the risks of energy price changes.