Influence of fuel price fluctuation on revenue in energy service business and risk hedge thereagainst

Energy service business (ESCO) is expanding among industrial users as a means of energy-saving. The ESCO business normally tends to become a long-term operation. During the operation, fluctuations of fuel and electricity costs significantly impact its stable operation. Therefore it is essential to reduce the fuel and electricity cost fluctuation risk. As a means of hedging against, fuel price fluctuation, a transaction called "financial derivative" is used. As the ESCO profit is also affected by electricity price, an appropriate method that manages both fuel and electricity price fluctuation risk has long been sought. In this paper, using the actual data obtained through quantitative analyses from existing plants, case studies have been conducted on the requirements for stable ESCO profitable operation using financial derivatives. We verified that the appropriate volume of fuel derivative to be implemented is less than half of that consumed at the ESCO facility, ranging from 5%-50%.