renewable fuels

Renewable fuels receive a lot of press, but the press often outruns companies’ ability to manage price risk.

Renewable fuels such as ethanol and biodiesel are increasingly becoming a significant component of companies’ fuel mix. However, they are rarely fully integrated into fuel risk management programs, the producer market is fragmented, price discovery and hedging options are limited, and correlations between renewable fuels and available hedge instruments can break down quickly. Nonetheless, Integrating renewable fuels into a traditional framework is a difficult, but necessary step.

An integrated fuel risk management program is incomplete if it does not fully encompass your company’s alternative fuel strategy. Whether it is bio-diesel, ethanol or a direct investment in a renewables fuel project, managing these risks should be considered in light of your overall exposure to fuel price volatility. Some of these products will not correlate perfectly with the fuel they are designed to replace and could magnify your overall exposure. Others may provide a natural hedge to fuel prices and you may be able to reduce your overall hedging quantities.

Some key considerations to modeling your renewable fuel risks include:

  • Locational availability and product liquidity in the various markets across the US;
  • Impact of planned production on current and future market prices;
  • Correlation between key fuel inputs (e.g. corn), outputs (e.g. ethanol) and traditional fuels (e.g. gasoline);
  • Understanding market fundamentals and how far out the curve you can effectively hedge; and
  • Determining the right hedging instruments to manage the identified exposure (in consideration of capital constraints).

Eco+Risk has the market experience and tools necessary to develop an integrated hedging model that incorporates the unique characteristics of the renewable fuel markets into the overall design of an effective hedge program.