Energy has the potential to impact company’s profitability – but not all energy sources will do it the same way. Here is what a financially-minded executive should think about.
1) Coal-based energy (eg much grid electricity) will likely be, for the next couple of years, relatively stable because coal is still available, and until its CO2 externality is not priced in via cap&trade its price will not fluctuate that much (it will though a bit due to the gas-based production part). So: there will be growth of cost, but it will not be short-term and erratic
2) Instead, gas and liquid-based fuel (used for other manufacturing and transportation) will indeed fluctuate (both the seasonal fluctuations might become wider in case of shortages, and the longer-term outlook might have strong volatility)
To illustrate these points see chart below showing the cost of electricity since 2005 in the US (DOE data, US dollar cents per KWh)
And compare with the volatility of the one below
This has substantial implications for our buyers/users:
1) For the CFO, all industrial processes that have strong non-grid electricity intake will result in cost-base volatility: the CFO will want to have that volatility managed (see COO and CPO below) and forecasted to manage the bottom line and try and avoid noisy earnings (which in turn reduce stockmarket value). In particular, the budgeting and forecasting piece means that we need to help ERP-based CFOs to do so properly and accurately (globally) – while giving visibility to the risk exposure when churning out the scenarios (low-high case) for analysts.
2) For the CPO, this means that understanding the level of demand, by location and time, is key to procuring properly
3) For the COO, this means that production of made-to-stock products may need to be planned differently, and operating capital requirements adjusted to avoid being caught into high-risk energy phases when production is supposed to run at full speed.
In sum, the impact of cost growth and volatility will vary depending on the energy usage, and will have implications for various CxO in ways that will materially alter their management.