Energy Budgeting is More Difficult (and Critical) Than Ever – Transparent Energy Can Help

By Brendan Boyle, Director, Market Intelligence, Transparent Energy, September 2024

With Labor Day in the rearview mirror, businesses are focused on finishing the year strong  while planning for both next year and the second half of the decade. With this in mind, let’s look closely at energy costs and energy budgeting, as both will continue to play an important role in a company’s overall financial performance.

A lot is happening in the world of energy. Recent developments in capacity markets, electricity demand growth, the upcoming presidential election, and a variety of other factors are driving near-term changes that will impact energy costs in 2025 and beyond.

And this volatility isn’t happening in a vacuum. Inflation, supply-chain delays, and higher interest rates have already been a thorn in the side of businesses as they work to achieve budget stability. That’s why getting the ‘energy piece’ of the overall budget pie is more important than ever.

In the past, energy buyers have had some success working directly with suppliers or utilizing a brokerage firm to provide a handful of bids for future energy supply. Recent developments in energy markets, however, are showing that those methods are simply no longer adequate to meet today’s energy challenges. Let’s look at some recent changes that support this notion:

Electricity

• PJM’s recent capacity auction – which resulted in a 750% weighted average increase in capacity costs (a key charge on every business’s energy bill) – demonstrated that power cost dynamics can change rapidly. PJM and other Independent System Operators have indicated analogous adjustments are underway. There is scant evidence to suggest that these upward cost adjustments will revert lower..
• Many parts of the country are expecting a systemwide shift in peak demand from the summer to winter months as more heating resources become electrified. The same thing is happening with the typical on-peak/off-peak balance due to the emergence of electric vehicles.
• AI and data centers are creating nascent demand for power at unprecedented levels.

Natural Gas

• Producers have shown a strong willingness to curtail output at lower price levels. While this has always been the case, technological advances in the drilling sector have allowed these price responses to occur with greater fluidity and at a faster pace than ever before.
• Liquified natural gas (LNG) demand growth has merely scratched the surface of its potential. As U.S. trade partners develop more resilient import capabilities, they can bring LNG to market much more efficiently.
• Pipeline infrastructure is aging, and the willingness to construct new pipes is limited. It is becoming increasingly difficult to move gas from production sites to areas of constraint.

All of these changes in the electricity and natural gas markets pose significant price risk for energy consumers. Individually, and collectively, they are bullish factors that threaten to push prices higher.

Put another way, these are all elements to consider when preparing energy budgets moving forward. Utilities and grid operators are regularly inventing new methods of collecting revenue to cover the cost of these changes.

Which is why we say the most important aspect of buying energy is to structure an agreement that eliminates the possibility of any unwanted surprises. And in order to do so, it is imperative to partner with a firm with experience across markets and business sectors.

What Can you Do to Prepare for these Changes?

• Work with an expert – Whether you are starting with a blank slate or are looking to clear one final hurdle to accomplish your energy goals, it’s vital to engage with a firm that is immersed in the energy markets on a daily basis. There are too many moving parts to allow for any margin of error. Trust your energy budget to a firm with a proven track record of executional excellence.

• Develop an action plan – Your energy advisor needs to understand how and when your business consumes energy and for what purpose. The ability to curtail consumption, load shift, or transition to backup fuel sources (key weapons in the fight against “capacity charges”) can reduce costs dramatically with minimal operational impact to your business. A sound procurement strategy not only focuses on timing the market and selecting a suitable term, but also on structuring an agreement that ensures flexibility and cost avoidance. Hint: You can’t take advantage of strategies to minimize capacity charges if you don’t have the right contract language in place.

• Play to win – The days of ‘set it and forget it’ are over. Utilize all available resources to make an informed decision. Discuss possible changes to your facility operations and identify areas of inefficiency. Even with an all-inclusive fixed price agreement, it is important to keep an active approach and regularly consult with your advisor to evaluate opportunities to blend your rate or execute a future hedge. Turn your energy contract into an asset rather than a liability.

Why Utilize Transparent Energy?

The team at Transparent Energy is uniquely positioned to provide guidance through this tumultuous time as we look to help our clients secure a firm grasp on future energy costs. It is essential to explore the complete network of suppliers when procuring an energy contract. Due to the nature of wholesale energy markets, different suppliers offer more competitive prices depending on the time of year, location, and their position in the marketplace. This competitive balance is in a constant state of flux.

The only way to avoid unexpected energy costs is to run a fully transparent reverse auction that includes every major supplier in the marketplace with the terms clearly stipulated in advance. Beyond having deep relationships with an unmatched network of suppliers across commodities and services, Transparent Energy has a technological platform that allows you to witness this bidding process in real time.

Energy markets are impossible to predict. Yet by implementing a strategic procurement process, you can take control of every aspect of your business’ energy future. That way, when unexpected events do occur, you can operate from a position of strength to mitigate any harmful ramifications to your company’s bottom line.

With Transparent Energy, you have the power to be at the forefront of these evolving markets and implement solutions that will mitigate risk and provide budgetary security for your business.

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Need help developing or sharpening your energy budget? Interested in executing your plan with the industry’s most effective transactional tools and expertise in the industry? Contact Transparent Energy today at letstalk@transparentedge.com.