In recent times, Energy Markets have witnessed an unprecedented level of uncertainty, while volatility was a all-time highs.
Here are some facts that give us a glimpse of the astounding scenario this year:
- A report by the World Economic Forum stated that we have had the biggest fall in energy demand in 70 years
- An analysis of 100 days of data by IEA projected that global energy consumption in 2020 will fall by 6%, in what it refers to as a “historic shock to the entire energy world”
- Fossil fuels bore the brunt of the fall in demand. The hardest-hit energy source was coal which was down by 8% at the beginning of 2020 – the largest decline since World War II
- Only renewables grew
Clearly this year, the Energy Risk Management capabilities of your Energy Management team have been put to test. Although, it should be noted that even before the current crisis, energy landscape was transitioning at an exceptional pace, making risk management plans fundamental to all energy buying strategies.
In this article we bring together some of the approaches that enables an organisation to have a comprehensive risk management program.
It is quite rightly said that risks cannot be eliminated, they need to be managed.
A top-down approach
According to research conducted by Harvard Business Review, one of the most critical aspects of Energy Management lies in the involvement of C-Suites. An energy strategy is hard to implement without explicit engagement from the CXOs and a clear governance structure. There is an ever-rising need to integrate ‘Energy’ into the company’s vision and mission statement. It should be a part of operational excellence where the consumption patterns get tracked at all levels. With a core team of senior leaders, who have a better understanding of business goals, financial positions, budgets along with decision making power, risk management strategies become more prevalent and stringent.
A cross-functional core team for Energy Management consists of members from across several segments of an organization. These members represent operations, facilities, finance, legal, procurement, sustainability, and other large teams. This core team gives a broader and in-depth visibility to consumption and cost patterns fostering better analysis and decision-making. Whilst it is noticed that the benefits of cross-functional communication may not always result into a measurable impact, it definitely supports better planning. A cross-functional energy sourcing team can generate many cost-cutting effects, including: minimising rework, strategising for preventive measures in the long term, consolidation of administrative activities, and improved decision making.
Leveraging technology, data, analytics
Advancements in technology have paved its way into every industry, categories and functions. Moreover, digitisation has been a key enabler of energy management and transformation in every business. As highlighted by various reports, digitisation of energy management has facilitated 2 to 10 percent improvements in production, along with 10 to 30 percent improvements in total cost of an organisation. Leveraging data generated from these digital tools and analysing them efficiently, play a critical role in creating a stringent and predictive risk management strategy.
Understanding the dynamics of Energy Markets
Trading of energy is an integral part of energy procurement and risk management measures. Pricing is volatile in an energy market, especially when companies opt for a flex contract – it depends on a number of factors.
These volatilities pose a threat to a company’s bottom-line, as budgets have to have floors and caps when they’re formed for the next couple of years.
Volatility and uncertainty is not directly proportional to budget certainty and precision.
Collaboration with Industry experts, participating in energy related congregations and understanding trading dynamics are some of the key facets of staying informed about energy market trends. They guide you in devising customised strategies relevant at an enterprise level as well as at a site level.
From a portfolio visibility and control perspective, it’s very important that everyone is on the same page.
Accessing the energy mix and their corresponding risks
As reported by EnergyLiveNews few weeks back, renewables secured 44% share of UK electricity mix in the second quarter of 2020. The published data shows that so far this is the second-highest share ever recorded in the UK.
Although, renewables are growing, costs are falling but its retail prices have witnessed a surge, and this is expected to continue in the near future. This is a result of a more complex industry that is evolving from centralised fossil fuel-based generation, to a decentralised and distributed renewable base. Such trends are critical to be factored in while working on risk management strategies.
Anticipating hidden and unexpected costs
At times the hidden costs that come along with energy buying processes is not taken into consideration at the planning stage. Some of these hidden costs include; tariffs and fees, or generally speaking energy non-commodity costs, costs for moving energy from generation facilities to end users, and also expenses for poles, wires, and other grid technology, which are passed on to end users. As energy is transitioning increasingly toward renewables, organisations can expect a noticeable rise in these costs.
Energy non-commodity costs are expected to account for more than 55 to 60 percent of a typical business energy bill.
Taking this into account at the preliminary planning stage, can help combat risks to a large extent.
Proactive Energy Management Approach
Energy buying is a nebulous and complicated task. However, by strategising your facility’s energy proactively, followed by efficient ways of managing, an organisation can achieve higher success rate during uncertain times. Similar to creating capital plans for a facility’s assets, energy should be tracked on a continuous basis to gain some insight into monthly use and cost. It is akin to preventive maintenance of your assets. Proactive management of energy is designed to understand where cost savings could occur, and where to be more efficient.
Risks are inevitable. Disruptive events lead to unexpected slow-downs and call for immediate actions to ensure business continuity. Here, corporate energy procurement and category managers play a critical role in maintaining resilience in operations and sustainability.
Having a holistic and long-term approach that takes into account unforeseen factors such as steep changes in production, consumption, price fluctuations and supply availability, prepares you for uncertainties, while a unified single platform for achieving this is an asset to consider.
Risk management is an enterprise-wide exercise. It needs to be engrained in the business culture of an organisation.