There are many risks facing businesses, but energy is rapidly rising up the risk agenda. A tough economic climate, growing volatility in energy prices and increasing legislative requirements have all contributed to making energy more of a top-level concern over the last two years.
In fact, the 2010 npower Business Energy Index, an annual report that tracks business opinion on energy use, revealed that businesses rank energy as posing a greater risk than health and safety, credit and security. They scored energy six out of ten in terms of the level of risk it poses; with legislation coming out as the top risk, scoring 6.7 out of 10. It is clear that organisations in the cement sector need to put effective plans in place now to reduce their exposure to future energy risks.
These findings, coupled with ongoing conversations with its own customers, led npower to commission a white paper from the London School of Economics – ‘Energy Risk Management for UK business’. The company wanted to provide a comprehensive guide to current energy risks and forecast how they will grow in the future. It was also designed to offer advice to businesses on how to manage their exposure to energy risk.
The top energy risks
The key finding from the white paper is that financial, reputational and legislative risks associated with industrial energy use are increasing. This is echoed by the company’s customers in the cement industry.
There are some key risks that energy managers need to monitor. These include the following:
- A continued upward trend and increased volatility in energy prices.
- New price risks and reputation risks from legislation such as the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) in the UK or the EU Emissions Trading Scheme.
- Increasing regulatory and technological complexity.
- Credit risks – a good credit rating is typically a requirement of any energy contract.
Being an energy intensive sector, the cement industry can use forms of contract to manage price risk in the prompt (short-term) and far market. Many plants may also have onsite generation, which can be traded on the grid and used within the site to reduce exposure to the market at times of high energy prices.
Some cement manufacturers may also be looking to align with international energy purchasing strategies, and as the decade progresses, greater incentives to flex load, as well as new indexed and financial hedge products from energy suppliers, are likely to emerge. If massive renewable/nuclear energy capacity really does come online as planned, and electricity prices become more volatile as a result, then the pay-offs from these forms of purchasing could become much more attractive.
How to manage energy risks
Cement manufacturers need to ensure that energy is a board-level consideration and work to control their exposure to risk by working in a collaborative manner internally - by combining their energy management and procurement processes.
Manufacturers that are quick to act and implement effective risk management strategies will not only reduce their exposure, but also benefit from cost and carbon savings. Businesses in the cement industry should also be aware of changes to external factors including legislation, so they are able to react effectively and manage their exposure to these risks as they evolve.
There are five key ways that cement manufacturers can seek to improve their energy management strategy:
1) Assign clear roles and responsibilities, and set targets for energy management, energy consumption and energy efficiency.
2) Make energy and carbon reduction a board-level or senior management concern to ensure that it is given appropriate consideration.
3) Take advantage of energy management services and products offered by the market that help to identify where savings can be made, including:
§ Some suppliers, including npower, offer monitoring and targeting software that has been developed to make it easier for energy managers to track energy consumption and reduction targets.
§ Alternatively, smart metres capture data on energy use, which can then be analysed to make informed decisions on energy efficiency.
4) Conduct an energy audit to gain a head start on energy efficiency. This can identify areas such as outdated plant and equipment, or the need for variable speed drives to reduce consumption on machinery.
5) Explore the possibility of, and any available government incentives for, renewable energy production onsite. For example, the UK government’s proposed Electricity Market Reform recommends feed-in-tariffs, through which the government would financially reward businesses that generate their own low-carbon energy. Those in the cement industry would be well advised to keep an eye on these proposals as they develop, in particular a white paper that was due to be published in the summer.
The future of energy risks
Ultimately, the main conclusion of npower’s white paper is that risks associated with business energy use are increasing. Energy prices are becoming more volatile and increasing regulation is placing further administrative burden and reputational risk on businesses.
As a result, it is more essential than ever for cement manufacturers to take action to actively manage their energy risk, by making it a board-level priority and working to develop an integrated strategy that combines purchasing and energy management. This will be a step-change for many, but it is crucial that the different people and departments responsible for energy collaborate and take advantage of the products and services from suppliers that are available.
It is important that they do this now so they can take advantage of cost and carbon savings and the reputational benefits of successful regulatory compliance and energy management.
Author: David Cockshott
Read the article online at: https://www.worldcement.com/europe-cis/27072011/the_route_to_managing_energy_risks_in_the_cement_industry/