Ruari Cairns, director of risk management from business management consultancy Open Energy Market discusses net zero strategies within energy procurement and opportunities within long-term power purchase agreements (PPAs) as well as on-site generation projects amid uncertain economic conditions.
It should come as no surprise that the current economic outlook is as precarious as it has been since the financial crash of 2008. While a recession remains anything but certain, spiralling mortgage rates, seemingly never-ending supply-side issues and inflation tracking well above many developed countries, lead to significant concerns about the health of the UK economy.
Market dynamics typically dictate that a recessionary outlook should lead to a softening of prices: the first lesson in any economics class will talk about the elasticity of demand. Simply put, higher prices lead to lower demand, leads to lower prices, leads to higher demand, leads to higher prices. And round, and round we go. Usually. However, many economists are fostering concerns that – while this cyclical nature of supply and demand will eventually balance itself out – the short-term impact of continuing high prices and a worsening economy could lead to a compounding negative effect on the economy.
Businesses may now have to contend with the twin challenge of a worsening economy and a higher energy price. But there are actions businesses can take to meet this challenge, mitigate the risks and limit the impact of a potential economic downturn.
Robust Risk Management Strategy
It is more important than ever to ensure that businesses are equipped to deal with any challenging economic circumstances. For businesses on flexible contracts, this means making sure their strategy can adapt to both rising and falling prices, utilising all the newest and most innovative risk management tools. For businesses on fixed-price contracts, this entails continually keeping abreast of changing market conditions and being ready to pounce when market prices look attractive.
The recent and significant drop in energy prices is a great opportunity for many buyers, particularly those with energy contracts renewing in 2023. There remains significant upside risk in the energy markets with continuing concerns over the operation of French nuclear generators, a cut in Russian deliveries and harsh winter conditions.
The current cost of the Winter-23 contracts are around £115/MWh for power and 118p/therm for gas. These contracts spiked in autumn of last year at £575/MWh and 722p/therm, so the reduction has been significant and represents real value for businesses that have contracts renewing over the next 6 months, and beyond looking to secure reductions on their existing energy contracts.
Product Selection
Over the last 12 months energy specialists, Open Energy Market, have seen huge growth in the number of businesses moving from fixed-price contracts into either flexible or fund-style contracts. Rather than purchasing 100% of a business’ energy requirement in advance, and at a price from one point in time, a flexible contract enables the purchasing of smaller tranches of energy throughout the contract year. This allows businesses to benefit from a more diverse strategy which can provide both upside protection against rising prices and downside participation in falling markets, with a strategy that can be tailored to a business’ Risk Appetite.
While there are some volume restrictions on purchasing a standalone flexible contract, a fund approach, where many businesses’ volumes are combined together, allows for access to a flexible-style product. The popularity of these products has exploded in recent years, with many businesses concerned about the high price of forward prices paired with a desire to purchase closer to delivery.
These contracts will not be applicable for everyone, but it is really important to ensure that businesses are assessing all of the options available. To complement these consultations with energy experts, it’s also worth implementing net zero platforms for accurate, real-time insights and robust energy mix modelling to aid an informed understanding of how effectively a business strategy is by accounting for market volatility over time.
Opportunities
The high prices of the last 12 to 24 months has led many businesses to look at any opportunity to help reduce costs and purchase in a more sustainable manner. The financial benefits and price stability of projects such as long-term PPAs or installation of on-site generation, can be realised in the mid-market due to the volatility of the energy market. With new funding methods coming to market, businesses do not have to deploy large capex sums to take advantage of the opportunities. Many new government schemes and incentives have further strengthened the appeal for businesses to underpin their sustainability journey. We would strongly advise anyone interested in understanding the various options available to their business to seek specialist guidance to effectively navigate the growing complexities of the energy market.
