Professor Eddie Anderson on overcoming the risk and uncertainty of the energy sector

It was his passion for mathematical concepts such as probability and optimisation that drew Eddie Anderson, Professor of Analytics & Operations Management at Imperial Business School, to the energy sector. With an honours degree in Mathematics and a PhD in Operations Management from the University of Cambridge, he has dedicated his career to understanding and addressing the complexities of energy economics through mathematical analysis.

A passion for mathematical analysis in energy

"The management of risk and uncertainty is often hampered by a belief that we know things we don't, and the long-term nature of this sector makes accurate forward planning particularly difficult," he explains.

Professor Anderson's research focuses on supply chain management, risk mitigation, and decision-making in an industry where uncertainty is a constant challenge. "Uncertainty is something all businesses face, particularly when it comes to developing future strategies and setting targets. And nowhere is this more challenging than in the energy sector, where so many domestic and global variables are at play,” he explains.

At Imperial, he teaches Energy Analytics and has published three books along with approximately 70 academic papers, further solidifying his impact on the field.

Managing risk in energy markets

One of the biggest challenges in energy economics is the unpredictability of pricing and demand. Professor Anderson highlights the dangers of overconfidence in predictions and reliance on technology without accounting that can bring high levels of future uncertainty. Political factors, unexpected global events like a pandemic or global conflict, and the risk of inaccurate predictions, known as "deep uncertainties “, further complicate forecasting.

"A mathematical analysis can help to manage these high levels of uncertainty and risk, and is essential in developing effective business strategies," he says.

It's a time-consuming exercise to flesh out a wide range of different scenarios, play with the variables, and identify what this means in terms of future strategy. But it's absolutely necessary, and by thinking outside the box, Professor Anderson says, we can minimise the danger of getting it wrong. This is crucial in a sector like energy, which is at the heart of all our lives and relies so heavily on long-term planning.

The challenge of predicting energy markets

The transition to renewable energy presents new challenges but in some ways we have been successful. While solar and wind technologies have become more cost-effective, we are committed to the goal of achieving net-zero emissions by 2050, a target which now looks increasingly unachievable.

Professor Anderson points out that carbon capture has not developed as expected, and renewables still struggle with supply-demand mismatches. Hydrogen has a role to play, particularly as a route to the decarbonisation of industrial processes, but the large amounts of energy storage that we need to address the supply-demand challenge are still problematic and very costly.

Price and demand

Price and demand are the two key variables in any business – and price in the energy sector is very difficult to predict or control. None of the various options available for a decarbonised energy system have prices that we can confidently predict ten years from now – and the demand side of the equation is also highly uncertain.   

As we move away from natural gas for heating and petrol for transport, the demand for electricity will increase dramatically, but we are struggling to anticipate by how much, and how quickly, this will happen, he says. One alternative to the more traditional methodology of probability is the concept of "Least Worse Regret" or "Minimax Regret". This looks at past decisions with the benefit of hindsight, tests the outcome of different policies and strategies across a broad a range of scenarios, and attributes a tangible value to the difference or "regret". 

"As a result of the energy transition to net zero, we are facing enormous uncertainties, some of which we can't easily put probabilities on, nor does it make any sense to do so," says Professor Anderson. "It means we need to find ways of planning to deal with that."

Exerting influence over energy demand

Professor Anderson emphasises that managing energy demand will require a combination of strategies.

"These might comprise 'smart' technology to control when energy is drawn down, pricing incentives and disincentives to lower demand at times of minimal supply, cost-effective energy storage, and ways to lower our overall energy demands – through better insulated buildings for example. It will take more than one of these developments to change the dynamics in this sector."

Professor Anderson wants to improve the way we look at energy going forwards: "This sector is a unique global ecosystem. It's in our nature as humans to be storytellers, but this sometimes comes with a confidence that simply isn't realistic.

"In the race to transition to net zero by 2050, it's vital that we acknowledge the things we don’t know and make use of analytical methodologies in creative ways to manage a very uncertain future."

During his career, Professor Anderson has held Faculty positions at Cambridge, the University of New South Wales, and the University of Sydney. Through his research and teaching, Eddie Anderson continues to influence the energy sector, shaping the way businesses and policymakers approach risk and uncertainty in an evolving global landscape.