Why You Need an Integrated Energy and Risk Management Strategy

Doing nothing is no longer enough.

If you’ve been paying any attention to energy markets this year, you know it’s been a wild ride.

Supply and demand shortages all over the world on the back of COVID-19, combined with surging economic recovery in some regions, has resulted in extreme volatility in power and commodity markets.

The outcome is risk of financial exposure to an unpredictable market. During periods of intense cold and heat, for example – like many of the bizarre but increasingly common weather events we’ve seen this year – budgets can explode, leaving companies struggling to keep up. And as sustainability deadlines approach, more and more companies are entering the environmental commodities market, meaning there is less and less liquid supply available to meet corporate goals.

The bottom line: There has never been a more important time to have an integrated energy strategy, one that considers risk exposure (both physical and financial), resilience, and a long-term plan for commodities management.

Let’s take a look at the issues affecting the market today.

Extreme price volatility

Today’s energy and commodity market looks nothing like it did a year ago, with extreme oscillations in energy prices all over the world. Some of these changes have been driven by periods of grid stress and demand, while others have been the result of the fluctuating energy sources that makes up today’s power grid.

Companies stuck in regulated grid regions have little say in what their utility bills look like. But organizations in deregulated markets can manage exposure to price volatility more strategically by buying at opportune times and structuring contracts that allow for the fixing of all or part of the energy load. But this can create more risk: exposure to volatile markets can be lucrative when market prices are low but can also lead to higher prices when supply and demand is tight. The result is the need for an ongoing price management strategy, where market awareness and timing become critical.

Demand-side management can also play a role. Load shedding and demand response can be used to allow customers to curtail their load during peak demand or periods of critical grid stress in exchange for compensation. Companies can build this strategy into their energy management plan to be rewarded for curtailing usage. Or, they may consider how to shift load to off peak times in order to take advantage of lower pricing, which may deliver cost savings.

Skyrocketing REC prices

At the same time as the significant price volatility in power, we’ve seen acceleration in the environmental commodities market, especially in the U.S. It’s leaving many companies that are dependent on unbundled RECs to meet their decarbonization or renewable energy targets in the difficult position of paying high prices to maintain their strategy or going back on their commitments – something no one wants to do in a period of increasing scrutiny and pressure on sustainability.

While REC prices have fluctuated based on supply and demand since their creation in 1999, the current $7-$8 REC prices we’re seeing in the U.S. are a game-changer. For many companies, the double whammy of unpredictable power prices and skyrocketing unbundled REC prices is a tenuous position.

This is forcing some companies to reconsider their renewable energy strategy, which may include long-term PPAs. These instruments may offer several protections against fluctuating power prices and commodity prices. And although they themselves come with downside risk, in some cases that risk may be minimal when compared to the risks of the fluctuating commodity market. Plus, PPAs deliver longer term benefits and additionality and are one of the best ways to make a sustained and significant dent in a company’s carbon footprint.

However, as power and commodity markets fluctuate, so do PPAs offers. The best strategy is to have a strategy, one that is nimble enough to allow organizations to pivot during periods of unpredictability.

Disruption = daily

This past year-and-a-half has given us real insight into the fragility of many of the systems on which we depend – including the power system. Whether it’s the escalating prices of steel and polysilicon – key components in renewable technologies – or system instability during periods of extreme stress, many organizations are starting to realize the significance of their energy system exposure.

The need for a more secure and resilient power supply is leading many companies to consider sources closer to home – like microgrids. Microgrids combine 1) situational awareness through data, 2) diversity in energy supply, 3) closer proximity to the consumption source, and 4) redundancy to create a stable, reliable source of generation – one that wastes less and is less subject to failure.

Typically used in critical facilities like government, data centers, and healthcare, the COVID-19 pandemic has changed what many of us consider “critical.” Today’s microgrids are more modular, less expensive, and can be a source of resilience for entire communities, as they act as backup power sources when larger grids go down – meaning that critical resources like grocers and distribution hubs can continuing operating even in the midst of emergency circumstances.

Considerations for a long-term energy management strategy

Active and integrated energy management is the new normal. The complexities and volatilities of today’s energy landscape require regular monitoring and adjustment. “Do nothing” is no longer a viable approach if you want to protect your bottom line and your reputation. Here are our top four considerations.

1. Proactivity is the new name of the game: you can’t do what you’ve done in the past, and you can’t rely solely on historic pricing when making energy related decisions. Instead, power supply and renewable commodities must be managed together – based on the risk thresholds you’re willing to accept.
2. Having a strategy is key. Organizations need to plan for disruption and volatility with clear supply and demand-side protocols in place – especially if your business is at physical risk of instability. Energy managers have to be familiar with all contracts, for both renewable and traditional power supply and commodities, to be prepared to make decisions accordingly.
3. It may be time to reconsider your options. If you’ve been relying on unbundled RECs to your your environmental goals, you may want to change your tune. Consider: where do you have other kinds of risk exposure, besides the potential downside risks you face with a PPA? Do you risk missing your goals if you can’t afford your RECs? Do you risk being locked into the need to source commodities indefinitely? And now is the perfect time to consider a microgrid, especially with the many innovative financing models available today.
4. Finally – it’s time to get an advisor. Preferably one that understands all the nuances and risks inherent in both energy (traditional and renewable) and environmental commodity procurement, and one who can provide the right tools to help you make sense of the market and your data. It’s especially critical to ensure that your advisor can take an end-to-end view of your portfolio to adequately balance your exposure in each of these unique markets and help you develop a holistic strategy.

Did you know that Schneider Electric is the largest corporate energy advisor in the world? We manage more than $30B in energy spend on behalf of our customers annually and are the leading consultant to help companies reach climate action goals through renewable energy procurement and environmental commodities management, having advised our clients on more than 300 offsite PPAs in 25 countries. Contact us today.