Energy markets are inherently volatile so it’s prudent to hedge against any risk that could affect your bottom line. With the demand to go green, many companies have committed to more eco-friendly energy practices, but are still tied down by monopolized energy supply chains.
One way to reduce energy expenditures is to hire an energy consultant and develop an energy risk management strategy and portfolio. Taking steps to mitigate risk can help you keep costs within your budget and create informed revenue forecasts for key stakeholders.
Questions often arise, such as how much capital do you hedge against energy consumption habits and variable rates? Beyond this, regulations, seasonal changes, and your location all greatly impact the volatility of your energy costs and can slowly bleed your company dry without much warning.
What is an Energy Risk Management Strategy?
Energy risk management is a general practice, but it essentially seeks to protect businesses from volatile energy markets by assessing market risk and client needs.
An energy risk management system main strategies include, assessing a business’s existing energy consumption, comparing them to price-movements within the energy market, identifying opportunities to institute cost-savings, and providing actionable solutions to execute cost-savings strategy. All the while, an energy consultant will provide risk tolerance portfolios that help to guide responsible parties toward more informed energy decisions.
Risk management policies help to implement controls and procurement processes that seek to establish a system for assessing and quantifying energy decisions.
Important Factors to Consider
When evaluating your risk management portfolio, be sure to account for internal and external risk factors. External factors include:
- Regulatory Changes
- Seasonal Changes in Weather
- Price Movements
Actively track and monitor changes in energy consumption, periods of peak demand, and your current price rate. This will help you create a baseline for energy objects and allow you to map out a predictive monthly energy budget to hedge against risk.
It’s always good to consult with an energy consultant on your current supplier contracts to shift risk. When prices are low it’s good to seek out a long-term fixed contract, especially before the winter or summer months. If contracted on a variable rate for your energy needs, it’s sagacious to track price movements to protect your company against seasonal price spikes that could happen in the event of a natural disaster or critical energy failure.
Mainly, you need to evaluate the opportunity cost of implementing new energy technology and when renegotiating contracts to hedge against capital risk.
Review and Report
Finally, you need to evaluate your current energy usage and compare them against future demands. Assess historic energy usage by season, location, and product type to include in your risk management portfolio. Write up a report to show to key stakeholders and collaborate on steps moving forward.
Evaluate energy usage and then quantify to assign a cost to your operations. Different software, such as an energy management software will give you alerts of unusual energy usage and help keep your budget in line. With new technology and a risk management portfolio, your business should be shielded from volatile price changes in an unstable energy market.