Navigating energy risk in turbulent times

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In this SustMeme Guest Post, Ruari Cairns, Director of Risk Management at True, powered by Open Energy Market, reviews energy procurement options and opportunities for controlling costs sustainably and strategically.

RC: In our current economic climate, instability looms large, echoing memories of the 2008 financial crisis. The threat of recession has hung over us since the end of the Covid lockdowns.

So, while optimism is on the rise, confidence in the markets remains fragile. Mortgage rates continue to plummet, supply-chain woes persist, and inflation remains stubbornly high.

Conventional market wisdom suggests that a recession typically coincides with moderating prices. This aligns with the fundamental economic principle of demand elasticity: high prices generally suppress demand, leading to lower prices, which in turn stimulate demand, ultimately pushing prices up again.

Whilst this pattern does hold true, there is a caveat. Economists are now sounding alarms that the combination of prolonged high prices and a faltering economy could spell trouble in the near term.

Businesses have therefore been compelled to adapt to these testing conditions and find ways to navigate the dual challenges of a weak economy and soaring energy costs. This scenario has forced them to adopt new strategic approaches — which will be essential if they are to avoid falling behind in an era of unprecedented change.

Strategic approach to procurement

One area where businesses are focusing their efforts is in managing their energy contracts more strategically (and sustainably).

Organisations have two primary options: flexible contracts, which require anticipating future price fluctuations; or fixed contracts, where you must decide whether you’re locking in at a favourable or unfavourable long-term price.

At present, fixed contracts seem most advantageous.

With energy prices recently experiencing a significant drop for the first time in months, it is an opportune moment for those considering new contracts.

Equally important, in terms of timing, is the fact that we are entering a winter predicted to be particularly harsh (at least in the Northern Hemisphere).

Looking at current rates, Winter-23 contracts are positioned at around £115/MWh for power and 118p/therm for gas. This marks a substantial decrease from last year’s peak, which saw prices at £575/MWh and 722p/therm.

This sizeable reduction offers tangible benefits for enterprises seeking contract renewals, allowing them to lock in their future operational costs.

Flexible, fixed, or fund-stye contracts?

Over the past year, True has observed a significant number of businesses shifting from fixed-price contracts to fund-style or flexible contracts.

These contracts enable businesses to buy into short-term energy contracts throughout the year, empowering them to capitalise on price changes and diversify their investments.

With increased market activity, businesses can safeguard themselves against significant price increases and take advantage of price declines.

As an alternative to standalone flexible contracts, which may have volume constraints, a fund-oriented approach pools volumes from multiple businesses, providing access to flexible product offerings.

Interest in these options has surged due to concerns about rising forward prices and a preference for procurement closer to delivery. However, it is essential to note such contracts are not always suitable.

A comprehensive evaluation of all available choices is recommended.

Collaborating with energy specialists for consultations and integrating net-zero platforms — like True, powered by Open Energy Market — is a wise step.

Such platforms offer precise real-time insights and robust energy-mix modelling, allowing for effective analysis of the performance of your strategy amid market volatility.

Cost-control in volatile markets

Overall, the extreme price fluctuations witnessed over the past year have compelled businesses of all sizes to seek innovative cost-control measures, whilst also contributing to sustainability goals.

Given the energy market’s recent volatility, options like Power Purchase Agreements (PPAs) and on-site generation deployment present significant opportunities in the mid-market segment.

Financial support through government incentives has also made these options more viable for businesses looking to enhance their sustainability efforts.

Portrait of Ruari Cairns, Director of Risk Management at True, powered by Open Energy Market.

Ruari Cairns is the Director of Risk Management and European Operations at True, powered by Open Energy Market. Ruari has two decades’ worth of experience in sales, relationship management, sourcing, and risk management. Ruari has worked around the globe, leading risk management departments across Hungary, Australia, and the UK. Championing ChangeMakers, True brings project viability, transparency and simplicity to the complex energy world, enabling users to build stronger financial-grade business cases and overcome hurdles to renewable investment.

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