It's time to change the paradigm of energy in your company
January 29th 2009

Energy prices are something that affect us all; record household gas and electricity bills and soaring forecourt fuel prices have a major impact on our personal lives. The problem is that as individuals it is virtually impossible for us to influence these things directly, so whilst it may give us concern it’s a problem which requires a political solution and invariably such things take some time to be resolved.

However, you can influence how gas, electricity and fuel costs, affect your organisation as energy prices for businesses can be influenced commercially rather than politically and if your company is still purchasing its energy in a traditional way then your company could be risking its competitive position, which means that ultimately jobs could be at risk.

The markets for oil, gas and electricity have been extremely volatile over the last 18 months, with oil prices increasing from $60 a barrel to over $140 a barrel before collapsing to under $40 a barrel last week. UK gas and electricity prices have shown similar levels of volatility and there is a good chance that your organisation has seen its competitive position materially disadvantaged in these market conditions. The question is what can you do about it?

Whether you’re an employee, company director or manage finance or procurement you need to take the following simple actions:

• Find out how much your company will be paying for its gas and electricity in 2009

• The current market price for UK electricity is £53/MWh and if your company is paying more than £35/MWh then your company has missed a commercial opportunity and you need to understand why

• The current market price for UK Gas is 57p/therm and if your company is paying more than 32p/therm then your company has missed a commercial opportunity and you need to understand why

In the event that you find yourself asking why your costs are higher than these examples or possibly even higher than the market prices quoted above then you are likely to get the following answers:

• We have the process under control you don’t need to worry about it

• The markets have been volatile there is nothing we could have done

• We are a conservative company and don’t like taking risks

• We have an advisor and they tell us the best time to buy and they got it wrong

In reality, if the process was under control then your company would have achieved better results and as such the following supplementary questions may be appropriate for you to ask:

• How does your company measure the risk it is taking? Energy prices change on a daily basis so surely your company is measuring its position on a daily basis and could quickly tell you how much risk they have taken

• How did your company react to the recent volatility in energy prices, whilst prices changed significantly the movement occurred over 375 trading days which means your organisation had 375 opportunities to solve the problem; what action did your company take?

• If your company is conservative surely it would have avoided a lot of the price volatility; again, what action did your company take?

• If your advisor has not managed to guide you through these challenging market conditions then what was the purpose of the advisor?

At Encore we have over 140 major blue chip companies with recognisable international blue chip brand names, representing $3bn of energy spend that do not need to ask themselves these questions and who have achieved the results described above.

Its time for your organisation to change its paradigm for managing energy costs and to do this you will need to encourage your organisation to take the following action:

• Introduce a robust measurement and control process so that your organisation knows how much risk it is taking with respect to energy costs on a daily basis

• Introduce a risk management process that allows your company to match its energy portfolio to the amount of risk it wishes to take

• Introduce a corporate governance process so that the process has the appropriate executive sponsorship

• Start to manage your energy costs several years into the future

• Start to manage energy price risk in the way that some of the biggest companies in the world currently do

These techniques are not new, some organisations have been using them since 2003, but in the current market conditions they are more important than ever. Your company’s future and your job could depend on it.

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