ENERGY MAKING RISKY BUS
WHAT IS ENERGY RISK MANAGEMENT (ERM)? Over four years, UK wholesale energy prices have doubled, halved and doubled again. No-one predicted these price movements or the extent of market volatility.
With the constant changes – volatile energy prices and markets; carbon legislation including FTSE companies set to have to report their carbon emissions – risk management and carbon management have never been more crucial. M&C Energy Group is the world leader in energy procurement and compliance services with clients benefitting from 35 years’ experience to help them save money and improve energy efficiency. They serve over 4000 clients with a combined annual energy spend of over £8bn. Here they outline approaches to energy risk and carbon
management. 30 PUBLIC SECTOR SUSTAINABILITY • VOLUME 2 ISSUE 5
The fixed-price contract renewal often comes as a shock to an organisation, yet increased input costs cannot always be passed on. Energy bill volatility can be the difference between profit and loss. Buying energy flexibly on wholesale markets is not a company managing price risk. Effective energy risk management accepts energy market volatility, but exposure can be managed through a rigorous process of strategy, governance, control and monitoring to deliver an energy budget meeting corporate objectives.
This can be achieved by putting a robust structure in place to constantly monitor the corporate energy portfolio’s consumption, network charges and performance to market. With strict corporate governance, and a risk policy consistent with chosen strategy, the energy spend can transform from a highly emotive board-level subject regularly giving nasty surprises, to a strategic asset helping deliver corporate objective. The energy strategy should be capable of responding to changes in corporate objectives, e.g. across financial years. A robust risk-managed approach to the energy challenge can deliver a paradigm change in how a company views its costs. Speculation, emotion and “what if” scenarios are replaced by a flexible approach turning energy into a powerful strategic asset.
HOW HAS ERM BEEN EFFECTED BY THE RECESSION?
The recession brought a collapse in commodity forward prices, including gas and power, in late 2008/early 2009. This bear market was preceded by the $147 per barrel peak in oil price at the height of the commodity boom.
These price shocks and subsequent economic difficulty affected energy risk management. Many energy buyers took fright at the rapidly rising cost of fixed deals and opted to fix price at or near the peak of market, often for an extended period, only to be stranded when markets crashed – a huge hit to cost competitiveness.
Many purchasers vowed never to fix prices long term again, and considered more flexible contract options at renewal. Equally, many organisations with flexible arrangements panicked as the market rose, and hedged their positions to place a cap on the upside risk, without having facilities to ‘unlock’ or sell volume back to the market.
A subset of these customers was then hit by significant imbalance charges because of their falling consumption breaching ‘take or pay’ clauses related to their hedged volumes. Businesses suffered from lower demand, and penalties resulting from over-hedged positions. The outcomes were an increased interest in flexible purchasing as opposed to fixed; robust risk management instead of emotion-driven market watching; and demand for more sophisticated products offering ‘sell back’ features and more regular options to re-declare volumes. During the recession, the restriction on credit facilities impacted on product
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