What is Energy Risk Management?

Managing risks associated with the energy industry is becoming increasingly complicated due to factors such as government regulations, public policy, financial concerns, and energy resource scarcity. In order to address these issues, impacted companies often implement energy risk management strategies. Energy risk management involves the process of pinpointing, evaluating, and prioritizing risks associated with uncertainty in the energy markets. Controlling energy risks can provide greater market assurance for companies like oil and gas producers, electric providers, and gas utilities. It can also give confidence to the insurance companies, banks, and manufacturers who work with these energy companies.

An energy risk management assessment typically involves several steps. The first step requires identifying all possible energy threats. Once potential energy threats have been identified, the risks associated with these threats are usually quantified and prioritized. The final step in an energy risk management assessment usually entails finding ways to address the risk. Solutions may include reducing the energy risk, monitoring the risk, or eliminating the risk altogether.

Different risks occur in different types of energy markets, and energy risk management strategies may vary depending upon which sector of the energy industry is being assessed. The electricity market, for instance, may pose different threats to a company than the oil or natural gas markets. Other factors that often present energy risks include climate change and environmental concerns.

Companies generally employ one or more methods for handling energy risk. The strategy chosen is usually based on the type of risk at issue. In some cases, a company may shift the risk to another party, such as an insurance company. In other cases, a company may either avoid encountering the risk or find ways to minimize negative impacts associated with the risk. Another frequently used energy risk management strategy involves accepting and accounting for outcomes associated with the risk.

Companies in the energy industry may use the services of an energy consulting firm. These firms are usually highly knowledgeable about the energy industry, and they can help companies create solid energy risk management plans. In addition, they can assist companies with assessing the impact of energy regulations. They can also assist with energy purchasing, evaluating energy costs, and developing energy conservation plans.

Some energy consulting firms serve as ambassadors for companies to government bodies. In this role, a firm may help structure competitive power markets or provide advice on energy tariffs. Some energy consultants also provide expert testimony in front of regulatory agencies or courts.