Energy Risk Management: The New Normal?
The measures to control the spread of COVID-19 are unparalleled; this has and is impacting Britain’s energy system. There have been massive short-term changes in the past, but this has tended to focus on supply of energy. This time, the disruption is on the demand side – supply is still available, but the demand for […]
The measures to control the spread of COVID-19 are unparalleled; this has and is impacting Britain’s energy system. There have been massive short-term changes in the past, but this has tended to focus on supply of energy. This time, the disruption is on the demand side – supply is still available, but the demand for it has reduced.
Shock to the system
If we look at the past decade, we know from 2010-2015, energy prices were relatively flat – where the difference between a favourable price and an unfavourable price was probably a 10% spread, therefore, buying decisions had a limited impact on total spend. However, fast-forward to 2015 onward, we can see the stark change in the performance of wholesale prices – where the percentage increase between a ‘bad’ and a ‘good’ price would be sitting firmly at 100%.
Ultimately, with the current COVID-19 situation, along with a plethora of other variable changes that we have seen across wholesale pricing over the past 2-3 years in particular – this is ‘the new normal’. As we move forward, we are expecting more volatility, continued price fluctuations and a regular ‘peak and recover’ cycle. Essentially, what we need to ensure is that businesses have an approach that is fit for purpose and allows them to manage this risk going forward.
For that reason, the need for a strategic approach to energy purchasing, that mitigates against the upside in a way that is appropriate for your business, is more essential today than it has ever been before.
Forming a robust and adaptable strategy
There are many approaches you could take in devising an energy purchasing strategy, there is no right or wrong way, but here’s how we’d recommend going about it:
- Evaluate – the process begins with an evaluation of your existing activity, establishing your appetite to risk and setting budgets and procurement objectives for your business
- Create – we recommend forming an ‘energy risk committee’ made up of the key stakeholders from both your consultancy and from within your business. Getting good mix of people who are key decision makers or can add valuable information (such as financial or operational) really helps! This group are then responsible for scoping the design of your Risk Management Strategy (RMS) to meet your objectives, this will capture and formalise the agreed purchasing approach that will be taken.
- Execute – usually the stage where your chosen consultant will take over and implement your chosen strategy using market analysis, regular reporting, and top industry insight tools. When trading, it’s also important you have absolute transparency of the wider marketplace and visibility of all wholesale energy prices.
- Review – a very important step! Once the strategy has been decided, it isn’t then ‘done and dusted’ for the duration of your contract, it’s an ever-evolving document. In a market with so many impacting variables, there are many circumstances where you may find your strategy needs to be adapted but unless you are regularly reviewing it, you may not necessarily be aware that it needs to change! This then gives you more control and less surprises.
There is no definitive time to change your strategy, it varies business to business. It is entirely dependent on your strategy no longer being fit for purpose and no longer meets your requirements.
Having said that, changes in your strategic approach should be consistent. If you are regularly chopping and changing it, you aren’t giving the strategy enough time to run to demonstrate good performance. That doesn’t mean to say you cannot change your strategy for the short-term, you just need to be mindful that a strategy needs to be in place for a significant period of time to prove it is delivering.
Ultimately, a strategy should be driven by the needs and wants of your business.
Or to learn more about establishing a robust RMS, you can listen to Inspired Energy’s Dorian Lucas (Energy Risk Manager) webinar – “The New Normal” – Adaptable Risk Management Strategies from our On Demand week here.