Risk Management: A Calculated Risk Can Equal a Great Decision
Risk is ever present in the world of electricity pricing. In many cases, it’s not a question of if the unexpected will strike, but rather when. Ontario is experiencing record electricity prices this winter that are showing strains on your energy budget. You are likely unable to pass along these price increases to your customers and need to find another way to manage these increases. You cannot look back and implement approaches that would have been beneficial. Instead you need to look ahead and assess the situation.
What can you do to proactively prepare for the unexpected?
Take a page out of golfer Phil Mickelson’s playbook at the 2010 Masters Golf tournament.
Mickelson had battled a two-stroke lead when he hit the ball into the rough to start the 13th hole. Most onlookers expected him to play safe – lay up on his next shot and hit safely onto the fairway.
After judging his own capabilities and the competitive situation, Mickelson came to a different conclusion. Instead he made the difficult choice.
Snaking the ball through the trees and over the creek just in front of the green. He committed to the tough shot, taking out a special club required to execute his strategy. He made the stunning shot, landing just a few feet from the hole, and went on to win the Green Jacket.
As an energy manager you may feel like Phil Mickelson stuck in the rough with a big portion of your energy budget spent in just the first three months of 2014. Although you may be in a rough situation, it is only 3 months into 2014 and there is still time to turn things around. Like Mickelson, it may be wise to take your special club out now.
Developing an Effective Risk Management Plan
You first need to acknowledge how challenging the current situation is and assess the tools and resources you have that will help put you back into contention for meeting your 2014 energy budget and objectives. Leverage the tools you have, even those that are not used on a regular basis, to find the right one for the job.
One of those tools is your company’s risk management policies for energy purchasing. Given that the energy market in Ontario is now operating without coal, and implementing more wind-energy sources, you can expect more electricity volatility. It may be beneficial for you to consider securing a fixed price for a portion of your total usage to assist your organization in mitigating this volatility. If the price goes up from where you secured it, you have some protection in place. If the price goes down you have the ability to participate with a lower average cost. It could be your shot through the trees that lands on the green for your business.
Developing an effective electricity risk management plan is an important element of your organization’s overarching energy management plan. Unfortunately, it is often viewed as something that can be dealt with later. It’s too late for the current increase in price volatility but you can get ahead of the next energy pricing situation by reviewing the merits of your energy strategy now. Have that review ready for your next management review where you can explain the current energy variance and provide a strategy to avoid the next variance in your energy budget.
Were you prepared for the current energy pricing situation? Be proactive and embrace the situation by implementing an electricity risk management strategy while there is still time to help your 2014 budget. There is an opportunity to develop and implement strategies that build on the learnings of electricity pricing we have experienced in 2014. Stay in the game and avoid a crisis.
Feel free to contact me to see how I can help you develop an electricity risk management strategy and how it can be a component of your overall energy management plan.