The Energy Trilemma Facing Boardrooms

Energy policy has a trilemma: It must combine security of supply, affordable energy costs and decarbonisation of the energy system - and these points are often contradictory. Most renewables are intermittent, and so making the energy system more resilient by ensuring that there is sufficient power available when renewables are not generating both increases costs and involves some 'dirty' fuel. Plus, decarbonisation is expensive, and all costs are borne by customers.

There was a time in the not too distant past when, unless a company was an energy generator or distributer, it did not need to worry about any of this. Energy was often not even a concern for a company's procurement department, let alone the board. Before electricity markets were liberalised, most companies could only obtain electricity from their local supplier, and no one measured their carbon emissions.

This of course started to change with a push to address environmental, social and governance issues, pressuring listed corporates to measure and reduce their carbon footprint. Private companies soon followed suit under similar scrutiny from customers, their workforce and institutional investors. The post-Covid invasion of Ukraine then created the perfect storm in Europe when cheap gas from the East was no longer taken for granted and energy prices soared. Supply chains remained disrupted, and a period of geopolitical tension began. At the same time, inflation and interest rates became stubbornly high, driving up costs. Controlling those costs and ensuring supply thus became a more pressing executive issue, requiring careful business decisions in an uncertain environment. And there is no one-size-fits-all solution to this issue.

In terms of energy supply, executive teams and boards now have both many options at their disposal and several decisions to make. Companies can invest in reducing their energy consumption by taking energy efficiency measures as well as implementing their own generation solutions. Plus, businesses not only need to be concerned about their primary energy use and where it comes from, they also need to measure and control the energy intensity of their supply chains. And, as the energy system moves towards decarbonisation, boards need to ensure their supply is future proof.

As political shifts continue to raise new questions for company ESG policies and trading environments continue to change, some things will stay constant. The cost and financial implications of energy decisions remain. Carbon footprint concerns aren't going away for anyone with long-term horizons. Boards recognise that the long-term success of the company requires an energy supply plan informed by both current and future business demands. Boards must navigate the interests of various internal and external stakeholders like their workforce, customers and activists, while balancing the availability and cost of financing, and the company's exposure to energy markets. And boards also need to think about the reputational aspects of their energy strategy, be that positive or negative.

This environment creates new opportunities but also poses new risks. While every company's circumstance is unique, the universal takeaway is clear: companies should develop an energy plan and keep it under frequent review. Boards must ask themselves some key questions: Is their energy usage future proof? What are competitors doing? And has the company adequately explored the potential cost savings and additional revenue streams achievable by putting in place their own energy efficiency, generation and storage infrastructure? Boards must also predict what their key stakeholders will think of these plans and how much capital should they allocate to them relative to other projects.

It's yet another item for the board agenda, but it is a vital, long-term one.

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