How can companies best navigate the era of energy market volatility?

Corporate energy procurement is being fundamentally altered by new reporting standards, market volatility, and fast-evolving clean energy transition.

The GHG Protocol, for instance, has proposed a number of changes to its Scope 2 reporting requirements covering emissions from corporate energy use, which are set to take effect in 2027 in a bid to improve the accuracy and transparency of emissions reporting. New measures include greater emphasis on users matching renewable energy purchases to both the hour and grid region where electricity is consumed, and criteria demanding that only certificates that meet higher quality thresholds will be eligible for market-based reporting. These changes are expected to transform how businesses - both large and small - buy electricity, use renewable energy certificates, and calculate market-based emissions.

At the same time, the global energy market is in the grip of its second major supply shock inside five years, with the Iran War sending oil and gas prices spiralling upwards and leading to what UN climate chief Simon Stiell has described as "brutal social and economic impacts worldwide". At the same time, as Stiell observed, the spike in oil and gas prices has resulted in the "immense irony" of some of the world's biggest fossil fuel proponents "inadvertently supercharging the global renewables boom" as businesses and governments look to reduce their exposure to volatile oil and gas markets.

Against this backdrop, BusinessGreen's latest Sustainable Talks webinar brought together experts to discuss what it takes to develop a well-rounded energy procurement strategy that both meets more granular reporting requirements and provides security in an increasingly unstable market.

Hosted in association with SE Advisory Services - the consulting branch of Schneider Electric - The future of corporate energy sourcing: Navigating demand, policy shifts and evolving Scope 2 requirements unpacked some of the main trends shaping how companies are responding to a rapidly changing landscape.

Market instability 'isn't new'

For Dr. Camille Louhichi, strategic advisor for energy and sustainability management at SE Advisory Services, it is important to remember the energy shock triggered by the Iran War is the latest in a string of disruptions following the Covid Pandemic and Russia's invasion of Ukraine. "Market instability isn't new, and it is probably not going to stop," she says.

The increase in Brent crude oil costs from around $60 per barrel in November and December last year to in excess of $100 in recent weeks - a figure Louhichi caveats "changes every minute" - and a similar spike in the price of liquefied natural gas (LNG) have translated into higher bills for consumers and companies. Given an estimated 27 per cent of firms are struggling to pay their utility bills on a monthly basis as things stand, the threat from rising energy costs constitutes what Louhichi describes as a "major trend".

"That [energy cost inflation] has a direct impact on their services and prices," she says. "Obviously that means it has an impact on procurement strategy and how companies are trying to make sure that it minimises the impact on the bottom line."

Ed Reed, associate director of training at analyst firm Cornwall Insight, agrees such uncertainty and pressure has seen energy costs for end users "increase materially", but warns the exact direction of travel for the long term remains a "great unknown".

"The 2020s have been so unprecedented when it comes to end bills for the consumer - particularly in the UK, where we haven't just seen some of the highest energy prices, but also some of the most volatile," he says.

Diversified sourcing to deliver energy security

One of the ways companies have sought to respond to such volatility is by diversifying where their power comes from, so they are not reliant on just one source or one location. "We're seeing companies doing more and more flexible purchasing and hedging - that helps them stabilise," says Louhichi. "We are also seeing more and more companies looking at being independent - turning their factories and manufacturing sites into mini power plants, wind, and solar on site."

One core component of this approach for Louhichi and her colleague Miguel Gil-Mast, director of renewable energy and carbon advisory services at SE Advisory Services, is power purchase agreements (PPAs), which can allow firms to essentially lock in energy prices for 10 to 15 years.

"Any time there is a spike in electricity prices companies are asking themselves, what could we have done?" says Gil-Mast. "Could we have protected ourselves against that? Could we have had some kind of price certainty before? And in a lot of cases, what renewable PPAs do, is provide stability for a buyer and for the seller of the electricity as well, so it's a win win." 

PPAs offer price stability, but as Gil-Mast continues there is value in "blending" power sourcing options together, allowing firms to manage risks and hedge their position by combining the likes of on-site renewables, with shorter term Renewable Energy Guarantees of Origin (REGO) certified clean power purchases, and longer-term PPAs.

The rise of 'more exotic' arrangements

Diversification has created a scenario in which both energy buyers and suppliers often pursue more flexible contracts that can combine a degree of price and supply stability with a degree of flexibility in how they respond to volatile markets. 

For Reed, market volatility and increasingly blended portfolios have led to more businesses agreeing what he describes as "more exotic arrangements", often directly between firms and renewable electricity generators.

With over half the UK's electricity now regularly provided by low carbon sources and the government targeting a clean power grid this decade, Reed argues there is more opportunity for "non-standard" renewable energy contracting - a trend he claims the technology, finance, and banking sectors are leading, with retail and water companies in hot pursuit.

Such contracts often manifest through businesses working with a supplier to buy tranches of energy over differing periods of time and at differing volumes. And though often more complex and challenging than standards PPAs or green energy tariffs, these agreements can also see some firms add solar panels or wind turbines in and around their sites to avoid some of the network costs they would otherwise face by generating some of their power on site.

"Those building these assets are looking at the end user as a route to market and to secure a customer for their outputs," he says. "Not only security of supply, but security of demand. In the past, these were largely driven by ambitions, desires - or maybe obligations - to demonstrate a lower carbon footprint. Those opportunities potentially give you a more stable price for an element of your overall consumption."

The rise of AI and automation

Recent energy shocks and growing demand for more granular data have coincided with the well-documented advent of artificial intelligence (AI) and greater energy management automation. This, SE Advisory Services claims, has yielded a marked increase in the number of discussions around how companies can harness the technologies to comply with more stringent Scope Two emissions reporting requirements.

"I think that's where AI can really support," says Louhichi. "We know that, in general, a lot of our clients are still using scattered and fragmented data - which can create humanly made errors in the analysis and the methodology. Having AI, being able to look after it, analyse it, standardise it, and have traceability is massively impactful for a company for reporting and for decisions around renewables and what they want to achieve."

This adoption can see companies deploy AI solutions or agents synced up to equipment or site operations in order to gauge when solar and wind power are most abundant and tailor their energy usage accordingly, for example. The creation of so-called "smart factories" ultimately allows companies to automate energy usage to minimise bottom line impact. It also provides more accurate and reliable data to comply with the more granular Scope 2 reporting standards being proposed by the GHG Protocol. 

New options for smaller buyers

Reed adds that although the market for more bespoke energy supply deals is still mostly dominated by larger, well-known energy, consumer, and retail brands, it is "evolving quite quickly" to the point where smaller businesses can also get involved. 

"There are a lot of options out there," explains Gil-Mast, highlighting the emergence of cohort PPAs where smaller companies in a supply chain are offered a chance to collectively access a clean power contract that could given them access to clean energy and stable prices. PepsiCo, for instance, signed such a deal to slash its Scope 3 emissions as part of the pep+ REnew program, supported by Statkraft, while the Energize program - sponsored by pharmaceutical giants such as GSK - recently offered a second cohort of supply chain firms to sign clean electricity PPAs.

Gil-Mast suggests such agreements are "low hanging fruit" that yield sizeable impact when it comes to decarbonising sprawling and complex supply chains. "We've helped hundreds of gigawatt hours of renewable electricity be procured just because companies set up these supply chain programmes that enable smaller companies," he says.

Scope 2 as a 'granular data' challenge

The pressure on supply chains to become more sustainable links directly into the increasingly complicated conversation companies face around slashing Scope 2 emissions from the energy they purchase and use.

Recent changes in regulations and frameworks make it "extremely hard to keep up", Louhichi admits, with companies increasingly pushed towards tracking and reporting location-based emissions from local grids and providing data on the emissions intensity of the power they are using on an hour by hour basis. The trend is away from relying on averages for the grid's emissions intensity and towards accurate data based on how much clean power is in the mix at any given time.  

"That requires companies to invest in more tracking," says Louhichi. "Being able to look at consumption and showcase 24/7 carbon free energy - that's where investors and regulators are pushing companies. Can you showcase where it was generated, used and when it was generated?"

This complexity and growing pressure on businesses to prove what and when they consume, has created what Louhichi describes as a "granular data challenge" around Scope 2 emissions.

Yet with energy and sustainability increasingly prominent topics of conversation at board level and energy firmly established as one of the biggest costs for most businesses, having access to clear, standardised, and granular data offers considerable benefits. Most notably, it should help companies identify areas of inefficiency where savings are possible and bolster the case for renewables and clean tech investment that promises to reduce both emissions and bills.

"Similar to in the medical field when we say informed consent - we give you the data, we give you the risk, we give you the potential, and then you're able to make better decisions," argues Louhichi. "That's why we need to have an understanding of current consumption. Hourly data is starting to be the gold standard. Having that understanding of exactly what you consume, how much it costs - specifically for someone like a CFO that wants to look at spending, consumption, and cost savings opportunities."

The overarching message from leading experts is that businesses that move beyond simplistic energy purchasing decisions and broad aggregated data, and instead look to actively manage their energy procurement and really understand their energy use at a time of market turbulence will be the ones best place to turn it from a rising cost into a competitive advantage.

BusinessGreen's webinar - The future of corporate energy sourcing: Navigating demand, policy shifts and evolving Scope 2 requirements - was hosted in association with SE Advisory Services, and can be watched back in full here.