How CFOs are planning for energy disruption
If the role of the CFO is to protect the financial health of organisations by minimising risk, then the job has become increasingly challenging in recent years. One of the most pressing risks that CFOs are grappling with today is ongoing energy disruption.
According to the American Express 2023 CFO Survey, conducted in France, Germany and the UK, 78.2% of finance leaders consider energy disruption to be a very or extremely important risk, while 19.9% view it as moderately important.
The potential costs of energy disruption are significant, with large businesses facing £8,500 in costs for every minute of downtime from power cuts [1].
To mitigate these risks, CFOs are focused on reducing energy consumption, meeting sustainability goals, and minimising the impact of energy shortages. They are collaborating more closely with IT and operations teams to create effective business continuity strategies. CFOs are also recognising the need to assess the risks within their supply chain and assist smaller suppliers in building resilient chains. Additionally, leveraging digital technology can provide valuable insights into supply chain performance.
Energy disruption remains a critical business risk due to ongoing price increases, global instability, and the frequency of extreme weather events. Only 0.6% of surveyed finance leaders consider energy instability to be unimportant.
CFOs who can build energy resilience are likely to see a significant reduction in energy consumption, with knock-on benefits to financial performance. Organisations that can increase their diversity of energy supply towards more sustainable providers will also be in a better position to meet stringent ESG targets.
The world faces greater energy insecurity today than at any time in the last 20 years, with the International Energy Agency declaring an energy crisis [2].
Economic recovery after the global pandemic has strained the global energy system, leading to sharp price rises in natural gas, coal, and electricity [3]. Geopolitical issues have also raised concerns about energy supply security, while droughts and below-average wind generation have impacted renewable energy availability.
The CFO’s role is changing into one with far wider-reaching strategic concerns. Finance leaders are increasingly involved in forecasting, scenario planning, stress testing, and business continuity. Looking ahead, they expect to be more engaged in modelling and forecasting over the next year. CFOs must identify and mitigate risks posed by the uncertain energy market, planning for various scenarios to enhance organisational resilience.
CFOs who prepare now for the possibility of energy disruption can reduce operational risk and mitigate financial risks associated with increased energy costs and new emissions regulations. This involves incorporating energy supply into scenario modelling and contingency planning that follows four major stages:
- Analyse and model the potential impact of disruption
- Agree on recovery options to protect core business operations
- Plan how to implement these recovery steps
- Rehearse, test and improve the plan
Contingency planning also considers indirect or secondary impacts of power disruption, such as reduced capital due to spiking energy costs, inability to provide vital services, transportation delays, and communication disruptions. CFOs are also assessing how power outages could impact different aspects of the organisation, including property, stock, personnel, IT systems, and communications.
To address risks, CFOs prioritise those most critical and likely to occur and develop immediate, intermediate, and long-term responses to energy problems. This includes evacuation plans, communication strategies, and measures to protect data, stock, and systems. Furthermore, CFOs are exploring short-term energy consumption reduction strategies and implementing grid resilience measures, like uninterruptible power supplies or battery energy storage systems.
The global energy system is changing, creating new risks for CFOs and their organisations. By taking a proactive approach to contingency planning and stress testing finance leaders can help to mitigate the risks and understand how to reduce the overall impact of changes in our global energy market.
