As a business owner, you know that energy is an essential part of your operations. From powering your equipment and heating your building to transporting your goods, energy plays a critical role in your day-to-day activities. However, the energy market is notoriously volatile, and fluctuations in prices and availability can have a significant impact on your business. In this article, we will explore the ways in which a volatile energy market can affect your business and what steps you can take to protect yourself.

Why has the energy market been volatile and will it stabilise?

In general, energy market volatility can be caused by a range of factors, including changes in global demand for energy, fluctuations in oil prices, geopolitical tensions, weather-related disruptions, and shifts in government policies or regulations. More specifically, in recent years, factors such as the COVID-19 pandemic, fluctuations in oil prices, the transition to renewable energy, and changes in government policies related to energy and the environment have contributed to volatility in the energy sector.

Here are some of the specific incidents causing this volatility:

Recently, the energy sector has been volatile due to various factors. The ongoing Ukraine/Russia war, even though the UK doesn’t depend on Russia for gas and oil, the drop in the supply of gas from Europe’s largest supplier and the world’s second-largest oil producer has resulted in elevated energy prices.

Moreover, the geopolitical situation and the controversial Nordic Stream 2 have highlighted how dependent many European countries are on Russia for energy supplies. Delays to the Nord Stream 2 project and a shortage of Liquified Natural Gas (LNG) supply have added to the volatility. Finally, recovery from the Covid pandemic has increased energy demand, which has been difficult to meet with supply.

Additionally, unseasonably cold weather conditions and less wind power have led to a lack of supply and an increase in demand, tightening the market and causing energy prices to rise.

Brexit has also played a minor role, with the UK no longer benefiting from the Internal energy market, making energy flows less efficient.

The Impact of a Volatile Energy Market

There are several ways in which a volatile energy industry can affect your business. Here are a few of the most significant impacts:

Higher Costs: When energy prices rise, your business’s operating costs will go up. This can be particularly challenging if you operate in an industry with tight profit margins. As energy costs increase, you may need to consider raising prices, cutting expenses in other areas, or both.
Supply Chain Disruptions: If your business relies on imported energy, disruptions in the supply chain can have a significant impact on your operations. For example, if a natural disaster or political conflict disrupts oil shipments, you may experience delays or shortages that can affect your ability to deliver products or services.
Uncertainty: A volatile energy market creates uncertainty for businesses. When prices are constantly fluctuating, it can be challenging to plan for the future. This uncertainty can make it difficult to make long-term investments or develop strategic plans for growth.

How does Energy Market Volatility affect energy prices?

Energy market volatility can impact energy prices in various ways. When there is a shortage of supply due to factors such as geopolitical tensions, weather-related disruptions, or unexpected shifts in demand, energy prices tend to rise as energy becomes more scarce. Similarly, when there is an oversupply of energy due to factors such as increased production or decreased demand, energy prices tend to fall.

This can also impact energy prices indirectly through the pricing of commodities that are used to produce energy, such as oil and natural gas. For example, if there is a spike in oil prices due to geopolitical tensions, the cost of producing energy from oil will also increase, which can lead to higher energy prices for consumers. Additionally, uncertainty in the energy market can lead to increased speculation and price volatility, which can make it difficult for businesses and consumers to plan and budget for their energy costs.

How does market volatility affect renewable energy?

First, market volatility can affect the cost of capital for renewable energy projects, which can make it more difficult for developers to secure financing. In a volatile market, investors may be more risk-averse, and lenders may demand higher interest rates or more stringent terms, which can increase the cost of renewable energy projects.

Second, market volatility can affect the demand for renewable energy. If energy prices are high due to supply disruptions, renewable energy sources may become more attractive to consumers as a lower-cost alternative. Conversely, if energy prices are low due to oversupply, demand for renewable energy may decrease as consumers have less incentive to switch to cleaner energy sources.

Finally, market volatility can also affect government policies and incentives for renewable energy. In an unstable market, policymakers may be more focused on addressing short-term energy needs rather than long-term sustainability goals, which could lead to reduced support for renewable energy.

Protecting Your Business from Price Volatility

While you can’t control the energy sector, there are steps you can take to protect your business from its volatility. Here are a few strategies to consider:

Diversify Your Energy Sources: If your business relies on a single source of energy, you may be more vulnerable to supply chain disruptions and price fluctuations. By diversifying your energy sources, you can reduce your risk and ensure that you have access to energy even if one source becomes unavailable.
Invest in Energy Efficiency: Investing in energy efficiency can help you reduce your energy consumption and lower your costs. By upgrading to more efficient equipment, insulating your building, and implementing other energy-saving measures, you can reduce your reliance on energy and improve your bottom line.
Consider Long-Term Contracts: Long-term contracts can provide stability and certainty in a volatile energy market. By locking in prices and supply agreements for several years, you can reduce your exposure to price fluctuations and ensure that you have a reliable source of energy.
Stay Informed: Keeping up-to-date on the latest developments in the energy sector can help you make informed decisions about your business. By monitoring prices, supply chain disruptions, and other factors, you can anticipate potential challenges and develop contingency plans.

How can energy procurement benefit my business during market volatility?

According to a survey by Deloitte, 57% of companies identify energy cost management as a strategic priority. Energy procurement can be an effective strategy for protecting your business from energy price volatility.

Energy procurement can benefit your business during market volatility in several ways. Firstly, working with an energy procurement consultant can help you secure favorable rates and gain access to wholesale energy markets, which can help you manage your energy costs more effectively during times of market volatility. By negotiating better energy supply contracts with suppliers, you can take advantage of favorable rates, and by gaining access to wholesale energy markets, you can secure the best possible rates.

Secondly, energy procurement strategies such as hedging can help you mitigate price risk by locking in a fixed price for energy over a set period of time. By hedging your energy costs, you can protect your business from price volatility and ensure stable, predictable energy costs, even during times of market turbulence.

How can my business reduce energy costs in a volatile market?

Reducing energy costs is an important goal for businesses looking to improve their bottom line. In a volatile market, energy costs can be especially unpredictable, making it challenging for businesses to budget and plan for their energy expenses. Here are some strategies that can help your business reduce energy costs in a volatile market:

Invest in energy efficiency: Implementing energy-saving measures, such as upgrading to more efficient lighting, HVAC systems, and equipment, can help reduce energy usage and costs.
Consider renewable energy: Solar panels and wind turbines can help businesses generate their own energy and reduce their reliance on the grid. In addition, the investment tax credit (ITC) and other incentives can make renewable energy more affordable.
Participate in demand response programs: These programs incentivize businesses to reduce their energy usage during peak demand periods. By voluntarily reducing your energy consumption during these periods, your business can earn credits or payments that can offset energy costs.
Negotiate contracts with energy suppliers: Shopping around for energy suppliers and negotiating rates and terms can help businesses secure the best possible deal on their energy supply.
Use energy management software: These tools help businesses monitor and track their energy usage, identify areas of waste, and make data-driven decisions to reduce energy consumption and costs.
Conduct an energy audit: Hiring an energy consultant to conduct an energy audit can help businesses identify areas where they can improve energy efficiency and reduce energy costs.

How a Volatile Energy Market Can Affect Your Business