ENERGY ENERGY RISKS FOR BUSINESS
A new white paper, commissioned by npower from the London School of Economics, has found that the risks associated with business use of energy are increasing. Dave Cockshott, head of industrial and commercial markets at npower, discusses the findings of the white paper and how organisations need to put effective plans in place now to reduce their exposure to future energy risks.
here are many risks facing businesses and energy is rapidly rising up the risk agenda. A tough economic climate, growing volatility in energy prices and increasing legislative requirements, have all contributed to making energy more of a top-level concern over the last two years. In fact, the latest npower Business Energy Index, our annual report that tracks business opinion on energy use, revealed that businesses rank energy as posing greater risk to them than health and safety, credit and security. They scored energy 6 out of 10 in terms of the level of risk it poses; with legislation coming out as the top risk, scoring 6.7 out of 10. These results, coupled with ongoing conversations with our own customers, spurred us to commission a white paper from the London School of Economics to provide an independent, comprehensive guide to current energy risks and forecast how they will grow in the future. The resulting white paper, Energy Risk Management for UK Business, was written
T
by Dr Samuel Fankhauser, principal research fellow at the Grantham Institute on Climate Change and the Environment at the London School of Economics and a member of the Committee on Climate Change.
AN OVERVIEW OF THE TOP ENERGY RISKS FACING BUSINESS
The paper was launched in November
at the London Stock Exchange. Its key finding was that financial, reputational and legislative risks associated with business usage of energy are increasing. So this means that organisations need to put in place effective plans now to reduce their exposure to future risks. Dr Fankhauser identified five key risks that energy managers need to monitor. These include: • a continued upward trend in energy prices
• increased volatility in energy prices
• new price risks from carbon regulation
• reputation risks from carbon
Table 1: Sector views A
lthough all sectors face similar uncertainties, some are more exposed to energy risk because they are intensive energy users and/or are more susceptible to the reputational risks of energy use.
Retail
The retail sector typically has many sites that are geographically dispersed, but improvements in metering technology have enabled much more sophisticated management of energy purchasing and consumption.
The retail sector consumes a lot of energy in refrigeration, heating and air conditioning, where most of this equipment runs under the simple control
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HOW YOU CAN MANAGE YOUR BUSINESS’ ENERGY RISKS Organisations need to ensure that energy is a board-level consideration and work to control their exposure to risk by working in a collaborative manner internally – by combining the energy management and procurement processes. The white paper stresses how organisations that are quick to act and implement effective risk management strategies can not only reduce their exposure, but also benefit from cost and carbon savings, therefore, strengthening their reputation. Businesses should also be aware of changes to external factors including legislation, so they are able to
regulation
• increasing regulatory and technological complexity.
See Table 1 for some observations for the retail, industry, utilities and the public sectors, which all have different priorities and courses of action available to them when managing energy risk.
of thermostats. Over the next decade, this might change. Sophisticated active management of equipment is rare now, but may become common. Already, at larger sites and distribution
centres, on-site generation can be traded in the short-term operating reserve market. This brings in revenue both for being in a state of readiness to generate and for actual generation. It can also cut supply costs by trimming peak demand at the site. In the future, demand from refrigeration, heating and air conditioning equipment may be traded in the same way.
Industry The importance of energy purchasing
varies greatly across industry. The most energy intensive can use forms of contract to manage price risk in the prompt (short- term) and far market. Many also have onsite generation, which can be traded on the grid and used within the site to reduce exposure to the market at times of high energy prices.
Some industrial organisations may also be looking to align with international energy purchasing strategies, but at the moment this is not an area suppliers can assist with. As the decade progresses, greater incentives to flex load, as well as new indexed and financial hedge products from energy suppliers are likely to emerge. If massive renewable / nuclear energy capacity really does come on-line
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