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Energy exposure , making a company vulnerable to supply shortages .
There are many approaches to optimize energy procurement , but success lies in addressing one of three imperatives : cost optimization , sustainability of supply , and security of supply . Approaches include , but are not limited to , captive on-site or off-site power generation from wind and solar ; power purchase agreements ( PPAs ), in which an industrial company commits to buying a given amount of energy at a fixed price ; and hedging in the futures markets .
In this article , we take a closer look at the pros and cons of these alternatives to traditional energy sourcing . The appropriate choice will vary by company , industry , and country or region . Regardless of this choice , it is incumbent on executives of industrial companies to manage their energy procurement strategies as they fight to remain competitive in a challenging market .
Four ways industrial companies can manage energy procurement
In 2022 , electricity and natural gas prices rose 500 percent and 690 percent , respectively , compared with average market prices from 2017-to-2020 . These price increases and market volatility were spurred by concerns about natural gas shortages resulting from the Russian invasion of Ukraine , maintenance issues with nuclear power plants in France , and an extremely dry start of the year . Europe ’ s spending on oil , gas , and coal in 2022 was 2.6 times higher compared with 2021 ( Exhibit 1 ). In the first quarter of 2023 , prices have fallen from their peaks but remain high relative to historical levels .
Energy costs rose sharply for many companies . In some cases , energy historically represented only single-digit percentages of total costs . Since 2021 , however , companies have seen increases of three-to-five times depending on their energy mix and exposure .
Exhibit 1 : European energy spending on oil , gas , and coal increased from 4 percent to 10 percent of GDP last year and will remain high until 2025 . manufacturing-today . com 29