How relevant is VAR for energy markets?

Despite its many limitations, value-at-risk (VAR) is still the most commonly used risk profile measuring tool in the energy industry. In this first article in a new series, Chris Strickland discusses why the energy industry’s love affair with VAR could be dangerous. Subsequent articles will investigate the alternatives

Energy organisations require risk metrics that provide well-informed decision-making to enable them to apply appropriate hedges, absorb market volatilities and price shocks and optimise their operations to improve profitability. However, in practice, risk management for many organisations is typically limited to calculating a value-at-risk (VAR) metric – and often this is the simplest form of VAR, called delta or analytic VAR. Given the industry’s increasing focus on the measurement and