Energy Risk: The Unmanaged Exposure Sitting in Your P&L
Every CFO knows the language of risk. Credit. Liquidity. FX. Interest rates. These exposures are measured, monitored, hedged, and reported. Boards expect nothing less. Yet one of the largest cost exposures in most mid-market businesses – energy – is left unmanaged. It sits in the P&L like a blind spot, leaking margin with every cycle.
This isn’t just an operational miss. It’s a governance failure. If energy volatility can swing your costs by 15–30%, and you aren’t treating it as risk, you’re leaving exposure unchecked. The question isn’t whether this costs you margin. It’s how much and how long before the board demands answers.
The Nature of Energy Exposure
Energy isn’t a simple commodity. It’s a bundle of costs – wholesale, distribution, capacity, regulatory pass-throughs – each moving independently. Add market volatility, regulatory shifts, and supplier tactics, and you have an exposure as complex as any financial instrument.
- Wholesale volatility: Prices fluctuate daily. Buying at the wrong point can add 20%+ to spend.
- Contract fragmentation: Multiple sites, multiple renewals, zero leverage.
- Pass-through charges: Non-commodity costs now make up 40–60% of bills, and they’re rising.
- Supplier margining: Renewal quotes baked with hidden premiums. Without benchmark data, you’ll never see them.
This is not a stationary expense. It’s a volatile exposure. CFOs who ignore it signal to the board that governance has holes.
Why CFOs Miss It
It’s assumption. Finance leaders assume energy is too tactical, too small, or too well-handled by operations. But dig into the numbers, and the assumptions collapse.
- “It’s small.” Wrong. Multi-site businesses easily spend $50k–$1M annually.
- “Ops manage it.” Wrong. Ops firefight. They don’t run governance frameworks.
- “Suppliers advise.” Wrong. Suppliers sell margin, not risk protection.
The blind spot exists because energy doesn’t scream until it’s too late – until the spike hits, the renewal lands, or the pass-throughs quietly inflate your bills. By then, you’re explaining variance to the board, not preventing it.
The Cost of Unmanaged Energy Risk
When you leave energy unmanaged, you invite four kinds of cost:
- Direct cost leakage: Higher unit rates from fragmented, rushed procurement.
- Budget volatility: No certainty on spend, leaving forecasts vulnerable to shocks.
- EBITDA erosion: Variance eats into margin without offsetting revenue.
- Credibility loss: Boards don’t forgive CFOs blindsided by predictable exposures.
The difference between managed and unmanaged energy risk is often millions over a contract cycle. If your competitor manages energy as risk, their baseline costs will always beat yours. That gap compounds every year.
If FX Looked Like This, Would You Tolerate It?
Imagine your FX exposure run like this: individual managers booking trades ad hoc, renewals left until the last day, no consolidation of positions, and brokers setting rates without competitive tension. Would you accept that? Never. Yet that’s exactly how most businesses run energy.
If unmanaged FX is negligence, unmanaged energy should be too. The only difference is convention. Finance leaders haven’t been conditioned to treat energy as risk. But boards will catch up – and when they do, excuses won’t pass.
Framework: Turn Energy Into a Governed Exposure
Managing energy as risk doesn’t mean micromanaging kilowatts. It means imposing a governance framework, just as you do with FX or credit. That framework is straightforward:
- Audit: Establish baseline exposure across all contracts and sites.
- Consolidate: Aggregate demand to create volume leverage.
- Strategy: Decide risk appetite – fix, flex, or hybrid – based on board priorities.
- Competitive Process: Force suppliers to bid against each other. No single-source renewals.
- Board Reporting: Express results in EBITDA terms, not utility jargon.
With this, you move energy from hidden leakage to managed exposure. You shift the narrative from firefighting variance to demonstrating governance discipline.
Board-Level Outcomes
Boards don’t care about kilowatt-hours. They care about EBITDA, risk exposure, and governance. Frame energy that way, and you elevate it instantly.
- Show reduced volatility in budgets.
- Show hard-dollar savings against benchmarks.
- Show governance processes that prevent margin leakage.
This turns a cost line into a credibility line. You stop explaining misses and start demonstrating control.
Start Where Risk Management Always Starts: The Audit
No CFO manages exposure without baseline data. That’s why the first step is always audit. Independent, forensic, site by site, contract by contract. Only then can you quantify exposure, consolidate leverage, and set strategy.
Energy left as “just another cost” is unmanaged risk. Energy audited, consolidated, and governed is protected margin. The choice is binary. Which side of it will you stand when the board asks?