How are you managing your energy risk?
Larger companies are experts when it comes to mitigating and managing risk: currency rates, bond prices, and interest rates are well known to treasury departments as factors that have real material impact on bottom line performance.
However, there is another strategic factor to consider, one that can potentially have the same material affect that all too often is missing from corporate risk assessment: the cost and volatility of energy.
Comparing energy prices in different markets with bonds and foreign exchange rates over 10 years in the chart below shows just how volatile energy costs can be. The problem is most companies are not tracking this in the C-suite.
Purchasing the power that keeps the business humming has gotten complicated. Deregulation, renewables, new technologies, and regulatory policy all affect the way companies purchase energy. If not nimbly handled, it can expose a company to significant risk, potentially sending a shock to the bottom line.
Energy purchasing decisions are often made in organizational silos. Commodity gas and electricity purchases are short-term in nature and typically look out three to five years. Renewables encompass a much longer timeframe, often going out 12 to 15 or even 20 years.
These short and long-term energy contracts are made by different people from different parts of the company, often without the benefit of knowing how one decision influences the other. This lack of integration exposes companies to risk.
Taking an integrated view of your energy supply can help mitigate this risk by giving decision makers a holistic view of near and long-term supply to match demand.
History tells us that energy prices are not stable and expose companies to price volatility over time. This exposure can be detrimental to a company’s bottom line if not managed strategically. A number of factors can appear over time that can significantly affect how much a company spends on energy (see Figure 1).
Reducing the Risk of Price Uncertainty
No one knows what energy prices will do in the future, but everyone has a sense of what could influence prices, from availability and extreme weather, to government regulation and policies.
Developing a strategic, integrated renewables-and-commodity energy portfolio can hedge against energy price volatility and risk. The specific allocations within that strategy are as variable as the commercial, industrial, and institutional landscape.
For example, a national large-format retailer may have both on- and off-site renewables opportunities, and may need to consider short-term commodity procurements with multiple regulated and deregulated suppliers. A medium-sized university in a deregulated market may be able to persuasively manage its risk with a single PPA, while a multinational industrial may require a portfolio of geographically distributed PPAs combined with a highly sophisticated short-term commodity strategy to maximize its value.
The key is to approach the market with independent, comprehensive access, and to consider them through the most rigorous economic, risk and diligence analytics suite available.
To learn more about energy risk and how to align commodity and renewable energy strategies, listen to Edison Energy’s recent webinar, Why Aligning Renewable and Commodity Energy Purchases Makes Strategic Sense, presented by Energy Manager Today magazine. Listen on demand here.
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