What the Iran energy shocks reveals about business risk
What the Iran energy shocks reveals about business risk
Joe Rawlinson, Environment Advisor at Business in the Community, explores how the Iran energy shock exposes business energy price risk and how to manage it.
When energy prices surged following US and Israeli strikes on Iran, a familiar narrative unfolded. Commentators pointed to the crisis as proof that the energy transition couldn’t come fast enough, and from a long-term perspective, they are right.
If we could meet all energy demand from renewable sources, prices wouldn’t be tied to global gas markets at all. But for an individual business in today’s market, it misses how the market actually works.
In the UK, and across much of Europe, wholesale electricity operates on a marginal pricing model; generators bid into the system in order of cost, and the price paid to all generators is set by the last, most expensive bid needed to meet demand. In the UK, this is usually gas.
What that means, practically, is that a business purchasing electricity from a 100% renewable tariff is still, in most circumstances, paying a price anchored to the cost of gas. When gas prices rise, as they did in March, renewable electricity prices rise with them.
So, switching your energy supplier to a green tariff before the crisis would not have materially changed your exposure to the price spike that followed.
What can responsible businesses do?
The answer lies in business climate risk and opportunity mapping. If done properly, this tool helps you understand where your organisation is exposed (to what, by how much, and through what mechanisms) so that you can make targeted and realistic decisions about what to do.
Understanding your exposure at that level of detail opens up lots of different options beyond the simple “transition to renewable energy” advice. This could include:
How can BITC support your business?
This is exactly where BITC can help. Our climate risk and opportunity mapping services are designed to draw a clear line between the risks you can mitigate and the structural constraints you have to navigate around.
The UK marginal pricing model is, for now, a given.
The global gas market is a given.
The geopolitical fragility of oil-producing regions is, sadly, a given.
Honest risk mapping works within those realities. It tells you: here is the exposure you carry; here is the portion you can hedge, diversify, or contract away; and here is the residual risk you will need to price into your business model.
The Iran crisis will not be the last disruption of this kind. The impacts of climate change will add physical stress to these systems: more extreme weather reducing storage and disrupting logistics, water stress affecting cooling capacity, agricultural shocks feeding through to food and energy affordability in ways that compound each other.
The businesses that demonstrate climate leadership will not be those who made the right bet on which energy source to back. They will be those who understood, precisely and honestly, what risks they were carrying, and made informed decisions about which of those risks were worth bearing and which were worth the cost of mitigation.
That is what climate risk mapping is for. Get in touch with BITC’s Advisory Services today to understand how we can support this process, and move your business from exposure to long-term resilience.
