6 Challenges and a Solution for Large Energy Users
How Large Energy Consumers Can Maximize Value
Trade wars and clean tech disruptors. EU elections and economic sanctions. It’s a complex, uncertain, and volatile environment for doing business.
Of course, if you’re procuring pencils and paper clips, life carries on much as before. If on the other hand, you’re purchasing huge volumes of power or gas, life can get very precarious indeed.
In Allegro’s latest white paper, we explore six challenges of energy buying for large energy users.
Challenge 1. You’re in the market now.
Any business that consumes large volumes of energy — whether it’s gas or power — is also in the energy business. You can buy directly from the energy market, use specialist agents, or even invest in your own generational assets. Whatever your model, the truth is you are an energy player. This exposes your business to input costs that are volatile, uncertain, and potentially very damaging to your bottom line.
Challenge 2. Energy price risks.
Even the most benign circumstances produce fluctuations in energy prices. Geopolitical issues are always lurking, ready to send wholesale prices soaring. Market fundamentals of supply and demand inevitably impact price, as do small and big changes to weather. Also, the energy markets are home to sophisticated buyers, sellers, users, investors, and speculators. An ill-timed purchase can find you seriously out of luck, and that’s before you consider credit and counterparty risk…
Challenge 3. Hedging can cause as many problems as it solves.
Commodity hedging has existed as long as commodity markets have been around. Contracts for difference and other derivatives can protect against price volatility, but also introduce another form of risk into the energy procurement business. Strict international accounting standards for hedges mean that these financial assets have to be accounted for in a compliant way. Get it right, and you can smooth earnings and avoid damaging breaches of accounting regulations. Get it wrong, and the financial and reputational costs can be huge.
Challenge 4. Environmental regulations will get stricter.
Energy is now a political issue — not just an economic one. With governments responding to the climate challenge under the scrutiny of citizens and voters, politicos will have to include large energy users in their regulatory remit. We know that including more renewable energy in the mix is going to change the energy markets and procurement decisions profoundly. What no one can yet agree on is the cost implications for market participants.
Challenge 5. Secondary markets pose additional risks.
If you’re buying energy, you need to understand your carbon footprint. More than forty countries have adopted some form of a carbon pricing mechanism. Thirty-one countries are covered by Europe’s Energy Trading System — which is obligatory for organizations in most of the large energy-consuming sectors. There’s also a cap and trade scheme for N2O from aluminum production, and new EU regulations suggest more cap and trade is on the way. Greenhouse gases are not good for the planet, and not good for your profits, unless you can make the right operational trade-offs.
Challenge 6. The energy market is far from uniform.
The energy sector is global. Many of the players within it are multinationals, but there’s no such thing as a single market place. The EU, for example, is aiming for an Energy Union across all member states (and a few of its closest neighbors). However, infrastructure, history, habit, and national resources create different network charges, environmental levies, capacity issues, exposure to underlying commodity prices, and renewable support costs. Even in the U.S., different states have different degrees of deregulation — and consequently exposure to wholesale price signals to manage.
The solution to these six simple challenges is evidence-based procurement: Getting the right information at the right time, to make the right buying decisions for your business. Specialist ETRM systems are designed to do just that. So, get started on your evidence-based journey today.
Download our large energy user white paper to find out how Allegro can help you solve the six challenges of energy buying.