Energy Risk Management & Technology: Trends for 2022
After living through a year like 2020, it’s safe to say that most people have come to expect the unexpected. For energy brokers, that sentiment rings especially true.
Energy is an ever-evolving landscape, and its risk factors have become especially volatile in recent years. Global energy markets and prices are moving fast — and they show no signs of slowing down.
All of these rapid changes introduce risk to energy consumers. Risk is nothing new, but on the heels of a global pandemic and calls for decarbonization worldwide, brokers and suppliers can count on facing a new swath of challenges that call for swift mitigation. And while risk mitigation is just part of the job, the brokers who leverage the right strategies for energy risk management are at a competitive advantage.
The Risks Challenging The Energy Sector
New sources of risk are introduced to the energy market all the time. As we enter our third year of the COVID-19 pandemic, expect to get acquainted with these risk factors, among others:
- Climate change: Market volatility can partially be blamed on the increasing incidence of extreme weather events. We witnessed this in Texas, for example, as an unprecedented cold snap swept the state and sent power prices skyrocketing earlier this year.
Californians are also subjected to higher utility rates as wildfires continue to grow in frequency and in size.
Given that the world is still a long way from meeting its net-zero emissions goals, it’s safe to say extreme weather incidents will only increase. As this trend continues, assessing and disclosing climate-related risks is an increasing expectation from investors and regulatory bodies.
- Supply and demand mismatches: If you drive a car, you’re probably among the many drivers frustrated with a recent hike in gas prices. That price increase isn’t random. As the world’s economies recover from the COVID-19 slump, demand is outpacing supply — crude oil production in the U.S. still hasn’t returned to its pre-pandemic production rates.
- Labor shortages: One of the most pressing challenges to the transition from fossil fuels to clean energy is the lack of skilled workers. An undersupplied workforce across the energy landscape introduces higher prices and more volatile risk.
How To Proactively Tackle Energy Risk Management
Heading in 2022, energy brokers will need to prepare to meet potential risks with data-driven mitigation strategies that enable quick, proactive action. As a broker, here’s how you can manage risk for your clients:
- Be nimble in your day-to-day energy management.
As the world changes, so should our energy strategies. We can’t count on old paradigms anymore — for example, that gas prices will go up in winter and down in the summer. (Thanks, climate change.)
That means you should manage energy risk dynamically. Look at long-term supply contracts with as much embedded flexibility as possible to spread price risk.
Brokers should also be prepared to act proactively when managing contracts. Don’t wait until your client’s contract ends to make adjustments. If you know there’s a new regulation coming in two years, for example, you can start to make plans for it today. If there are potential changes to a client’s facility operations, take the necessary steps to ensure that their strategy and coverage are flexible enough to handle that instability.
- Leverage the technology that will support real-time decision-making across energy sources.
That means investing in the tools that provide data-driven insights and automate processes for faster, more accurate deal flows.
Take the Dash platform, for example. Brokers save hours of manually inputting data into spreadsheets thanks to our AI-powered SmartScan™ technology, which automatically pulls important information from PDFs, Excel sheets, scanned documents, or images. Not only does this save time, but it also means data is processed with higher accuracy and data integrity. The insights are delivered straight through our platform for easier, faster consumption, enabling speedier and more relevant decision-making.
- Proactively diversify your energy procurement strategies.
In other words, don’t put all your eggs in one basket. Diversifying energy sources is a crucial strategy for achieving energy security, even in the swells of a shifting market. Utilize a mix of products (like PPAs and BPAs) to create contracts that combine green power with brown. Be sure you understand your clients’ appetite for risk, and ensure there’s clear communication for all projects and across business functions to reduce the risk of goal misalignments.
The Takeaway: Prioritizing Action
Energy risk management is crucial for navigating the complex global energy markets. This requires aggressive, proactive action when dealing with challenges like extreme weather patterns, global pandemics, and policy changes.
A gentler, “wait it out” approach can prove to be detrimental to your mitigation strategy. You can’t predict everything the market will throw at you, but you can be armed with the right tools and mindset to serve your clients with the dexterity needed to navigate uncharted territory.
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