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Strategies to Mitigate Energy Risk in an Era of Increasing Volatility

Energy markets are experiencing significant price and supply volatility in 2022, including some of the largest single day price increases of all time in oil & gas. Energy demand is outpacing energy supply around the world, due in part to the economic resurgence post-COVID lockdown, resulting in an undersupplied market. In addition, geopolitical factors, extreme weather, and the global transition to clean power and fuels are also impacting energy and other related commodities, like carbon offsets. Organizations need to prepare for continued volatility by developing a proactive risk and energy procurement strategy. In this blog, we'll explore some of the risks associated with energy volatility, and strategies to mitigate these risks to ensure your organization is as resilient as possible.

Energy supply and price volatility is a reality of today's market – and likely tomorrow’s, too

Disruption is the new normal in today’s energy markets. Due to geopolitical disruptions, extreme weather events, and supply/demand dynamics, prices can fluctuate quickly and dramatically which can make it difficult for organizations to budget and forecast energy costs accurately. Unplanned outages or disruptions in supply can cause prices to spike as markets react to increased uncertainty. This can lead to higher energy costs – sometimes into the millions of unplanned, unbudgeted dollars – and leave gaps in energy reliability that can impact organizational resilience.

Energy management best practices

To develop energy price and supply resilience, organizations need to understand the levers that impact their operations, budget, and bottom line. Global energy markets are increasingly interconnected, and regional disruptive events that occur in one part of the world frequently have a reverberating impact on the global energy market.

Developing a corporate energy procurement strategy will allow organizations to prepare for and mitigate most market disruptions. It’s essential when developing a strategy to understand the terms and conditions of energy supply contracts. Signing long-term energy contracts when prices are high can lock an organization into high rates, while signing short-term contracts when prices are low can expose companies to price fluctuations. Those organizations who take a “wait and see” approach to energy contracts will increase their risk and exposure to volatility, while organizations who proactively manage the terms of their energy contracts will mitigate that exposure.

Contracting terms can be very complex and differ by region and supplier. Understating the nuances of the terms and covered energy load are critical to maximizing the value of the contract. It's important to carefully design a procurement strategy that minimizes volatility risks.

In addition to mitigating risk through contracts, organizations can use several other strategies to manage volatility.

Developing an energy management plan can help organizations better understand their energy consumption patterns and identify opportunities for improvement. Implementing energy efficiency measures reduces overall energy demand improves organizational resilience.

Diversifying the energy supply mix or procuring power from multiple sources can also help mitigate the impact of unexpected disruptions or outages. One diversification strategy is to add renewable power to the energy portfolio. Renewable energy adoption is on the rise as it helps organizations reach net-zero emission ambitions and obtain price parity with more traditional forms of energy in many markets. Renewable technologies are readily available in many markets and produce energy more efficiently than their fossil-based counterparts, driving additional decarbonization in energy supply. Moreover, studies have demonstrated that, despite the relative intermittency of renewable power sources like wind and solar, renewables drive greater grid reliability over time.

Another energy reliability opportunity that is increasingly being pursued by organizations – especially those who must operate 24/7/365 – is the microgrid. Made up of a diverse variety of potential components (including generation, storage, and demand), microgrids can provide a source of back-up power generation in the event of grid failure. Some systems can even be “islanded,” meaning they can operate independently of the grid. Once predominantly used by emergency facilities, more and more corporations are now considering microgrids as the prevalence of grid failures due to extreme weather and other unpredictable events occur.

Develop resiliency through energy procurement to manage volatility

Energy markets are growing in complexity and interconnectivity, and as a result, are experiencing a great deal of price and supply volatility. This volatility can have significant impacts on businesses that are not prepared for it.

No matter what strategies organizations adopt to manage this volatility, it is important to have a risk management process in place to continuously monitor and react to changing market conditions. The energy market is constantly evolving, and organizations that stay ahead of the curve ensure better operational resiliency in the face of volatility.

For global organizations that operate many facilities across various regions, taking steps to create greater supply resilience can be a difficult undertaking without external support from energy procurement experts. If you're concerned about how your organization might be impacted by energy volatility, please watch our 2022 Global Energy Outlook: The Energy Trends to Watch or contact us to discuss our market-leading energy advisory and procurement services.