TfL Hedge Funds

MQT on 2015-01-21
Session date: 
January 21, 2015
Question By: 
Murad Qureshi
Labour Group
Asked Of: 
The Mayor


Which Hedge Fund is TfL using to hedge against energy prices?


Answer for TfL Hedge Funds

Answer for TfL Hedge Funds

Answered By: 
The Mayor

The reference to "hedge funds" is not accurate, as hedge funds are not used for the purchase or hedging of energy. 

The hedging of financial risks, like volatility in energy prices, can be undertaken with banks. However, TfL does not currently mitigate its exposure to the risk of changes in energy prices through hedging with banks.

TfL has outsourced 99 per cent of its energy purchasing (circa £130 million per annum) to the Crown Commercial Service (CCS), which acts as TfL's Risk Manager and Framework provider. The current framework suppliers are EDF (electricity) and Corona (gas). Purchases are managed by CCS on a 30-month forward rolling basis taking a tiered approach, where CCS places purchase order levels with suppliers on a monthly, quarterly and seasonal basis based on a minimum volume profile, which is where TfL is essentially "hedging" its future risk to changes in wholesale energy prices.  The ability to agree pricing in advance is on the wholesale element only of around 60 to 70 per cent of the total cost, whilst the remainder is made up of various taxes and levies which cannot be hedged.

CCS are the largest energy buyer in the UK. It pools together the energy requirements of a number of other public bodies and customers (around 200 in total) including the NHS (£215 million), Ministry of Defence (£160 million), Ministry of Justice (£50 million) and the Welsh Procurement Service (£55 million). TfL makes up about 10 per cent of the total portfolio managed by CCS and, as such, has a seat on the risk governance board which reviews the risk management framework as well as the performance of purchases compared with the market. Position reports are circulated weekly which track the volume purchased and provide price forecasts over the following 30 months. The CCS is a not-for-profit organisation but TfL does cover costs of circa £80,000 per annum. The supplier margin saved in undertaking this pooling of exposures is around £500,000 or 50 per cent per annum.