The need to weave agility throughout the business
With geopolitical tensions, more extreme weather events and the legacy of a global pandemic, it is more difficult for energy suppliers to preserve their margins and remain competitive than ever before. To thrive in the current climate, it is imperative that a supplier can make marginal gains wherever they can. One way to ensure this is to weave agility into the very fabric of the organisation.
The three pillars to success for energy suppliers
Profitability within the energy sector hinges on three distinct pillars. The company’s ability to manage risk, forecast accurately, and adapt swiftly. Unfortunately, managing risk can be exceedingly difficult for energy suppliers as each day is a moving target. And the ramifications of not doing so effectively are high. A minor misstep in risk management, caused by an error or faulty data, can swiftly plunge an energy supplier into severe financial trouble or even lead to bankruptcy.
To help manage risk it is important that energy suppliers centralise all their disparate data silos so that there is complete transparency across their risk management teams and various executive stakeholders. Comprehensive data integration is crucial for effective risk management today. It should include everything from demand forecasting and hedging to scheduling, daily settlements, churn analysis, and book valuation.
When it comes to accurate forecasting, the same is true. However, many energy suppliers are limited by manual, outdated tools that are no longer fit for purpose. This is a real problem as without timely access to the requisite data, it is difficult for them to forecast accurately. This can lead to poor positions that will cause margins to shrink and can lead to higher prices for customers. Modernising these processes is, therefore, vital to maintaining competitiveness.
The need to adapt swiftly has never been more important for suppliers. The market is more dynamic than ever before. Plus, customers themselves are far less brand loyal and willing to shop around. Whether it is changes to rules and regulations, unexpected weather events, or large-scale customer signup and churn, it is important that an energy supplier can quickly react so that they can buy the energy needed as efficiently as possible.
The need for a supplier to be smart
To be agile in business requires intelligence and insight. Thankfully, the advent of smart meters has helped provide a window into what energy a customer is using and when. However, the industry has been disappointingly slow to move towards smart meters, with global penetration currently languishing at just 43%.
Other barriers to agility for suppliers have been financial. There still remains a credit crunch within the industry, with suppliers rarely being given attractive lines of credit for the energy they need to buy. Energy suppliers need to, therefore, establish risk management policies and procedures internally. They must also understand the impact of risk measures such as Value at Risk (VaR) which can be used as part of the calculation to require cash and collateral from the supplier. It is worth the effort. Energy suppliers that use VaR as a daily risk measure can also show stakeholders that they have implemented a level of sophistication that is protecting the liquidity of the organisation.
The other main barrier we see is one of knowledge of what it truly takes to be able to compete. Many energy suppliers have been set up by brokers who unfortunately do not understand the nuances of being one.
The pathway to future agility
Another huge barrier to agility in recent times has been the difficulty in gaining the insight locked within the ever-growing data mountain. The widespread move towards renewables, though to be applauded, has led to more data than ever before. In fact, the industry is now thought to generate up to 200 exabytes of new data each and every year. This has only made the problem worse, with much of this data being locked up within older, custom software systems that can be difficult to integrate. This needs to change.
Thankfully, there is now technology available – underpinned by the latest artificial intelligence (AI) and machine learning (ML) – that can sift through this mountain of data in a timely manner, providing a pathway to agility. One of the main benefits of AI and ML models is that they can be constantly retrained and are granular right down to the individual meter level. This makes them extremely accurate and circumvents the inaccuracies common with manual data entry.
For instance, during extreme weather events like the 2021 Uri storm in Texas, AI can quickly validate and extrapolate mountains of new data, enabling suppliers to manage such crises effectively and avoid catastrophic losses.
An era of unpredictability
The global energy industry has never been more competitive. Yet, it has coincided with an era of unprecedented weather extremes driven by climate change. This, in turn, has led to unprecedented price volatility, making it a particularly challenging time for suppliers. With margins so tight, price too high and a supplier will be priced out of the market, price too low and they will lose money.
To stay competitive, energy suppliers must swiftly respond to market dynamics by embracing tools that are accessible from anywhere and rely upon automation to analyse a wealth of real-time data. Without these tools, it would take humans months to sift through the same information. This way, suppliers have the intelligence and insight to make the right decision, first time, every time.
