Energy risk management: How businesses can protect themselves from market volatility

As energy markets become more volatile, businesses must manage their energy costs more effectively. Global power demand growth slowed to less than 2% in 2023, owing primarily to lower consumption in industrialized economies experiencing economic slowdowns and rising energy costs. The European Union, for example, saw demand fall 3% for two years in a row, pushing consumption to levels last seen in 2002. Despite recent drops, wholesale electricity costs in places such as India remain much higher than 2019 levels, with rates 80% higher in the first half of 2023.

In this unpredictable environment, businesses rely on energy risk management measures like fixed-rate contracts, flexible procurement alternatives and diverse energy sourcing. Businesses that use these solutions can stabilize expenses, secure their budgets and align with long-term sustainability goals despite market headwinds.

Fixed-price contracts: Locking in stability

Fixed-price contracts are an effective option for firms looking to protect themselves against volatile energy markets. These contracts stabilize expenses by locking in energy rates for a set length of time, shielding them from market-driven price increases. This method has proven helpful in energy-intensive industries where cost volatility directly affects profitability. 

According to a Deloitte survey, energy-intensive enterprises that chose fixed rates prior to recent surges saved 15-20% on yearly energy expenses compared to those that used variable rates. Fixed pricing is an excellent choice for businesses seeking budget consistency, especially in today's volatile market conditions.

Flexible pricing: Adapting to market conditions

Flexible or variable pricing allows enterprises to take advantage of lower rates during off-peak times. In this arrangement, energy rates are aligned with market dynamics, allowing enterprises to save significantly when prices drop. Implementing demand flexibility solutions in the residential and commercial sectors, for example, has indicated potential savings of up to 40% per year, totaling up to $250 million in certain regions. 

However, this strategy necessitates regular monitoring and active energy management, as businesses may incur more costs during peak periods. Organizations can avoid increased rates by shifting loads to off-peak times, which could save up to $3 billion in energy production expenses every year. Flexible pricing can be a cost-effective option for businesses with adjustable energy needs, but it requires proactive risk management to handle periodic cost increases efficiently.

Hybrid contracts: The best of both worlds

Hybrid contracts are a good fit for companies that require both stability and agility, as they combine set rates with market pricing. Businesses can protect their core operations from unexpected price increases by locking in a base rate for vital energy while leaving some of their energy exposed to variable rates so they can benefit from market declines.

For companies whose energy consumption peaks and valleys throughout the year, this approach is ideal since it lets them scale up or down without having to commit to a fixed price plan. Fixed rates provide stability during peak demand, while market rates provide for savings during off-peak hours. Additionally, hybrid contracts offer stability in an unpredictable market by allowing businesses to include renewable energy sources when prices are favorable while maintaining predictable expenses and operations.

Strengthening resilience by diversifying energy sources

Incorporating renewables — such as solar, wind and energy storage — into the energy mix is essential for enhancing resilience and reducing dependency on traditional, volatile energy markets. Using diversification strategies helps manage risks tied to fuel price fluctuations, supply chain disruptions and geopolitical tensions — thus creating a more stable and secure energy future.

According to the International Renewable Energy Agency (IRENA), the cost of solar energy has decreased by nearly 70% since 2010, while wind energy costs have dropped by around 40%, making renewables not only cleaner but more economically viable. Businesses that have integrated renewables report considerable energy savings, along with a significant reduction in greenhouse gas emissions, reinforcing both financial and sustainability objectives. These savings can be even greater when paired with energy storage, which allows companies to use stored power during peak pricing periods, further stabilizing costs.

By including renewables in their energy portfolios, companies can achieve greater energy independence, insulating themselves from the volatility of fossil fuel markets and enhancing long-term resilience. Key benefits of renewable energy integration include:

• Reduced costs: Solar and wind costs have dropped by 70% and 40%, respectively, since 2010.

• Energy savings: Companies report 5-15% in savings from renewable integration.

• Sustainability gains: Reduced greenhouse gas emissions support environmental goals.

• Enhanced energy independence: Minimizes exposure to fossil fuel market fluctuations.

• Increased resilience: Energy storage enables stable power supply during peak demand or pricing surges.

EnerConnex: Providing customized solutions for a volatile market

At EnerConnex, we focus on creating practical energy strategies that help businesses manage the challenges of an unpredictable market. With access to a broad supplier network and detailed market analysis tools, we work with you to choose the right procurement model — whether fixed, flexible or hybrid — based on your specific needs and risk preferences. Our approach isn’t just about controlling costs; we also help you incorporate renewable options and use data insights to build a stable and sustainable energy plan.

By partnering with us, you gain real-time insights and industry expertise that keep your energy costs stable and competitive. Reach out to EnerConnex to develop a straightforward, customized energy strategy that supports your goals, even in a volatile market.