What you need to know (and do) about your energy
The energy landscape is undergoing rapid transformation becoming more sustainable but increasingly complex. Meanwhile, commodity markets are becoming more volatile, resulting in record-high energy prices.
Never has it been more important for businesses to develop an energy strategy to mitigate and manage – and take advantage of – these uncertainties and complexities.
The proposed strategy of different players can be categorised according to the graph below. Four categories of energy users are captured defined by their energy cost as a fraction of total cost, and by the value creation opportunities they have whilst going about their business – or, to put it differently – the business’ ability to generate revenue from buying and selling energy should they choose to manage their energy differently.
This category refers to businesses for which energy is non-core but can still be part of their offering, e.g. large real estate companies. These companies should be creating value by supplying energy. They need to understand their own energy procurement requirements and how energy efficiency and flexibility fit into that.
This means that they should think about their customers’ needs and operations, which dictate their energy requirements and help them reduce their energy consumption or avoid peak hours. By using less or less expensive energy they can create profit for their business. Developing insight into how energy prices may change in the future would also be a useful capability to develop. However, a subscription service offering insights into markets, industry standards and electricity prices is a good place to start.
Key questions for ‘Opportunistic’ players to answer are:
How can I avoid peak hours?
How can I reduce my energy use?
How can I serve my customers’ needs?
Can I create value from energy storage in the future?
Companies that fall under this category deal with big volumes of energy in their operations and energy is also a primary component of their offering. They have a good understanding of the different procurement types and of the direction of their asset value; their primary objective is to start thinking about how to make a margin out of their energy use. Data centres are a classic example; investing in understanding energy efficiency and flexibility strategies is crucial.
Energy remains a primary cost driver for these businesses, and hence the need to build their understanding and knowledge of how markets work and what the energy transition looks like. In order to do that, they should have a team working on acquiring an in-house view of the energy markets, able to propose a strategy that will result in long-term low prices and energy security. ‘Optimisers’ need to know:
What should my strategy on PPAs be?
Should I buy energy up front?
What is the price of electricity likely to be in the future?
Would there be benefits to installing batteries in my facilities?
Big end-users of energy (e.g. operations) belong in this category. What characterises them is that energy is a significant proportion of their total operating expenditure but not of their offering. These businesses need to focus on how they will spend less on procuring energy; minimising their energy cost by exploring energy efficiency solutions should be their priority to achieve significant savings in the long term. Knowledge and capability around energy markets and the main drivers that define them (supply, demand, grid capabilities) are also beneficial.
Given that energy is a significant proportion of their total costs, good management of it is essential; there’s a strong case for partnering with an external provider with expertise in energy procurement to create a strategy to tackle increasing prices based on current and future needs. Any such partner will take a view on spot prices and futures, with a clear mark-to-market understanding. Questions ‘Smart Outsourcers’ need to answer are:
How can I reduce my energy use?
Do I need to buy energy upfront?
What will the future of energy storage be?
How will the prices of electricity and gas change over the coming years?
This category includes businesses that do not depend heavily on energy and lack opportunities to create significant value out of it. Energy is a less significant part of their everyday operations and there is little value to be had from a better understanding of the energy landscape. Nonetheless, keeping energy use to a minimum would have significant benefits for the organisation. Energy efficiency should be achieved by targeting the behavioural change of employees and retrofitting where possible.
The purpose and operation of each business play important roles in defining energy requirements and approaches to procurement and use.
Developing a deep understanding of these, and the needs of customers will determine the strategy that a company should follow in combatting the negative effects of the current energy crisis. In an environment where energy costs can make or break a business, it needs to be a priority!