Energy risk: How businesses can reduce costs in a volatile market

Hedging has a role in cutting energy costs when lowering consumption is not enough to offset surging prices


Energy risk_How businesses can reduce costs in a volatile market_tablet

[Article originally published in the MF Magazine]

By Andrew MacDowall. 04/02/2022. The world is facing its most serious energy crisis since the 1970s, putting severe strain on many businesses. Gas prices have soared, electricity costs are up, and even the cost of unfashionable coal reached an all-time high in October 2021. Elevated prices have pushed several UK energy suppliers out of business and raised fears of a long winter ahead, with the situation looking set to persist well into 2022.

The crisis has forced businesses to scramble to manage soaring costs and acted as a stern reminder that the companies that can pre-empt inevitable energy price fluctuations are best placed to weather them.

"We meet CFOs regularly; how you deal with energy cost volatility is a matter of financial management," said Benedict De Meulemeester, owner of Belgium-based energy procurement consultancy E&C. "You don't know whether energy prices will go up or down, but the one thing you do know is that they will always be volatile. We encourage clients to do some deep thinking [about] how their companies' profit and loss are affected by energy cost changes."

But as De Meulemeester noted, the surges in energy prices seen in the second half of 2021 have been considerably larger than those that normally occur in a 10- to 15-year commodity cycle. "The run has been unprecedented," he said.

Companies in more deregulated markets, such as the EU and some US states, have been particularly affected, as have energy-intensive firms such as fertiliser producers, some of which have cut output to reduce costs.


Response strategies

While reducing energy consumption is a reasonable way to reduce energy costs at times of lower volatility, De Meulemeester argued that it should not be regarded as a silver bullet.

"The cheapest megawatt hour is the one you don't consume," he said. "But if you see gas prices go up by 450%, you can't reduce energy consumption by the same amount. I see companies making real efforts to reduce energy consumption, but not doing anything on the energy procurement side, so the budgetary benefits are lost."

Read the full article in the MF magazine ↗


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