Energy prices have made headline news recently. After a period of relative stability, prices have risen sharply to unprecedented levels in a “perfect storm” of events spearheaded by the global natural gas market.
Energy buyers around the world have been caught out by the speed and scale of these price rises and are now facing the prospect of huge, unbudgeted bills for natural gas and electricity this winter. Even those who have protected themselves for the short-term will be looking ahead to 2022 and beyond, and wondering how they are going to cope with this drastic rise in cost.
With the exception of heavy industrial businesses and other intensive users, energy is not typically considered to be a core element of a company’s strategy, despite energy bills representing a significant cost line. With this, many companies are not conducting the necessary risk analysis and resilience planning to understand how external factors could impact their business and financial bottom line.
Whilst this behaviour is understandable, it is a mistake. Energy costs over time are unpredictable. A falling trend in energy cost—even over a couple of years—by no means guarantees that prices will continue to fall in the future. What’s more, when a quiet period for wholesale energy markets comes to an end, it usually ends with a bang!
Wholesale gas prices have risen by an average of 250% across the world since January 2021. Many countries have seen drastic and record-breaking increases in wholesale energy costs and are desperately competing for supplies, putting intense pressure on the global energy market due to stiff competition.
Here are just a few recent examples of global events that have shocked the market.
Due to tight pressures on supplies leading to much lower levels of stored gas, in early October, the U.K. saw natural gas prices increase from 240p/therm to over 400p/therm (167%) in only two days—where prices were already at the highest sustained levels since the U.K. gas markets were deregulated in the 1990s.
February saw a distressed electricity market across the U.S. caused by extreme weather conditions in Texas, which led to some end-users facing energy charges 50 times greater than usual.
Brazil relies heavily on hydro-power and is currently experiencing its worst drought in decades, causing the country to depend on Liquefied Natural Gas (LNG) imports to power the country.
Similarly to Europe, China is running short on energy and is scrambling to gather as much supply as possible before the winter. The country is struggling to keep the lights on in some regions, forcing them to rely on other fuel sources like oil and coal.
Energy buyers should take the time now to reflect on whether their energy sourcing and risk management strategy is aligned with their business priorities. Many organisations are working with a strategy that was set many years ago and haven’t reviewed whether it is still appropriate for them given the changes to their business and in the markets, as well as changes in best practice and the emergence of new energy buying options.
Experts are constantly developing and evolving a multitude of buying options to help companies manage their exposure to long-term price rises and market volatility, depending on the exact nature of their business and strategic priorities.
Setting up the right risk management strategy might include the purchase of renewable energy, which can dovetail with a company’s zero-carbon roadmap to achieve a commercial advantage whilst accelerating the achievement of sustainability goals.
Set a risk management strategy for energy and review it regularly in light of changes in the markets, your business and evolving best practices.
Don’t be led into a false sense of security by temporary periods of calm in market prices.
Consider new long-term options for buying energy that could dovetail with your zero-carbon roadmap.
Fully vet and understand your commodity supply agreement terms and conditions.
Now is the perfect time to reconsider your energy buying strategy and take a fresh look at the opportunities available to bring financial stability and long-term sustainability to your business.
Is your organisation in need of better risk management practices? ENGIE Impact is a trusted energy procurement partner for businesses across the globe—developing energy buying and risk management strategies, running competitive procurement exercises, managing budgetary risks, executing market opportunity assessments, communicating market intelligence and analytics, and more.
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