A guide to Risk Management in an era of energy cost volatility

The latest edition of the IEA’s Global Energy Review confirmed that global energy demand increased by a faster-than-average 2.2% in 2024, amidst a growing need for all major fuels and energy technologies.

Alongside ongoing geopolitical instability, such as conflicts in Ukraine and the Middle East, and the transition to renewable energy sources, this growing demand is putting pressure on the energy grid and testing the interoperability of the evolving energy mix. The resulting energy cost volatility and often higher energy prices contribute to volatile inflation and economic uncertainty. 

In times of unpredictable energy costs, businesses face challenges in choosing the right energy supply, and in ensuring stable energy costs. Securing a reliable energy strategy while dealing with global uncertainties, changing policies, and evolving technologies is no easy task.

Will energy prices stabilize in 2025, or does more volatility lie ahead? This article breaks down key factors to watch for in the coming months, including managing risk when navigating energy supply decisions.

Here are the key factors to watch in 2025, and beyond, to help inform your risk management strategy:

Ongoing geopolitical tensions continue to impact the market.

• Political instability in key energy-producing regions could lead to supply disruptions and price volatility as the year goes on.
• In Europe, ongoing volatility in the natural gas market continues to put pressure on competitiveness and the cost of living, with prices surging to their highest level in two years in February 2025.
• The halt of transit of Russian pipeline gas through Ukraine since January, as well as a return to average winter conditions after two milder-than-usual winters, has driven up withdrawals from gas storage facilities.
• The start of a second Trump administration is causing geopolitical tension, with planned trade tariffs and the ramping up of North American LNG facilities. 

Monitoring these tensions and diversifying supply sources will be crucial in developing an effective risk management strategy in 2025.

Growing pains amidst the energy transition cause new challenges.

• Renewable energy integration: The increased integration of renewable energy sources into the electricity grid is leading to newer capacity-related impacts on energy cost fluctuations across the world. Governments are investing in low-carbon energy solutions - including wind and solar at an unprecedented rate, in an attempt to increase low carbon spend by 60% by 2030 to meet the goals of the Paris Agreement. In 2025, this is projected to surpass oil and gas investments for the first time, signaling a major turning point in the energy transition. 

Businesses should consider focusing on energy efficiency investments such as grid modernization and energy storage to mitigate price fluctuations as the drive for renewables continues.

Regulatory approaches evolve to manage new normal.

• Regulatory shifts: Most governments worldwide are shifting their energy policy to focus on renewables, bringing regulatory change around carbon emissions and energy efficiency standards. In the UK, the seventh Carbon Budget has recently outlined stricter carbon reporting and mandatory emissions reductions for the next decade to shift the way businesses manage their carbon footprints. The US, however, is heading in the opposite direction with the Trump administration weakening some environmental regulations. 

As frameworks change, businesses must prepare for evolving compliance requirements that will reshape corporate climate strategies and could impact cost.

Managing power and gas costs effectively, while balancing external and internal factors. 

It’s important to acknowledge that no two businesses are the same, expert insights help to find solutions that meet unique needs and find opportunities in the marketplace. 

A common, and often key, aspect of many risk management approaches is ensuring you have the relevant hedging strategy in place. This is often a balance between the risk appetite of a business, how far forward a business can entertain a hedging strategy, and the requirement for cost certainty.

Navigating risk in a volatile market: The important role of hedging.

To help navigate these upcoming changes, businesses must consider how they are managing risk. This starts with understanding the role of a strong hedging strategy.

1. Understanding the basics of hedging: Hedging is a strategy used to mitigate the risk of price fluctuations by locking in future prices or limiting potential losses. In the context of the rapidly-evolving energy landscape, hedging can help business procurement teams to preserve financial stability, and gain cost certainty.
2. Physical vs. Financial Hedging: There are two types of hedging: physical and financial.
   • Physical hedging involves covering the exposure, in full or partially, of a physical supply agreement at predetermined points in time, or market price levels. This allows a business to secure long-term supply agreements without the need to fix the wholesale element of the contract. This therefore creates the ability to risk manage a large cost of the agreement by distributing the fixing of the energy cost.
   • Financial hedging involves using derivative instruments such as futures, options and swaps to offset price risk. These instruments are generally more liquid and allow a business to access liquid financial markets if their business is in an illiquid physical market, as well as other less vanilla products such as virtual storage. Financial instruments are also beneficial for businesses that may be constrained by unfavorable credit as the business would have access to multiple financial counterparts, not only their supplier.
3. Choosing the right hedging strategy: Hedging strategies are unique to individual businesses and their risk profile, their market outlook and their operational requirements.  It is important to identify your business’ position before confirming an approach.
4. Tools for implementation: Businesses must create a shortlist of tools and methods for implementing their hedging strategy, to ensure the hedge is executed effectively. 

World Kinect offers expertise and customized solutions to help you navigate and implement your hedging strategy.

All risk management approaches require ongoing optimization, businesses must learn how to optimise effectively over time, to stay agile in the evolving energy landscape. Follow our key factors to watch, in order to effectively manage your business’ power over time:

• The importance of ongoing risk management: Optimizing your hedging strategy, streamlining your operations and protecting your energy budget from unexpected price spikes can all help to protect profit margins. It also allows you to take opportunities to open exposure for downside reward in a sustained bearish correcting market.
• Learning to manage cost and carbon reporting: Companies will need to stay ahead of the curve when it comes to new climate regulation – the EU, China, and Brazil are among those nations who have already implemented requirements for corporate climate disclosure mandates. Carbon accounting and decarbonization strategies will become a crucial part of defining your business’ sustainability.
• Balance action today, alongside plans for tomorrow:
  • Short-term strategies (0-12 months): Ensure your energy risk management strategy is robust, meeting your business needs.Implement real-time energy monitoring to help your business identify and address energy waste quickly and consider demand response programs as vehicles to reduce energy consumption during peak periods.
  • Medium-term strategies (0-2 years): In the medium term, consider investments in efficient equipment and technology improvements. This may include Power purchase agreements (PPAs) and onsite renewables, such as solar.
  • Long-term strategies (2+ years): Long-term energy planning should involve developing a comprehensive plan that aligns with your sustainability goals. It could factor in energy storage systems, electric vehicles, and microgrids.

Taking stock of your energy supply and implementing a risk management strategy is critical in navigating today’s volatile energy market, and providing the cost certainty required for future investment to meet sustainability goals. Businesses that equip themselves with the right knowledge and tools to navigate the complexities of the global energy market will ensure they achieve their energy and business goals.