3 Things You Need to Know About Buying Energy Right NowSeptember 28, 2021
As businesses and institutions struggle to get their heads – and balance sheets – around the reality of rocketing natural gas and electricity prices, I wanted to offer some perspective as someone who has seen many market highs and lows over the last dozen years – and help you continue to procure energy with confidence and in a way that helps your organization.
Here are three insights I’d like to share with you:
- Back to Back “Perfect Storms”
It’s hard to believe that only a year ago, we were explaining the perfect storm that had created historical LOWS in natural gas prices. That was a story of widespread demand destruction unleashed by the pandemic (COVID reducing both economic output and the need to power large buildings, etc.) combined with natural gas oversupply and mild weather. Putting it more simply, it was a classic supply and demand story, i.e., one where a glut led to historic lows.
But we knew that wouldn’t last.
We urged clients and prospects to take advantage of those lows and go out as far as they could to hedge their risk. And we went on the public record saying so in press releases and articles. One conclusion I want to share with you is that if this spike in energy prices has caught you by surprise – and by that, I mean that your current energy advisor/broker or internal team didn’t alert you this change was coming – that should be a major red flag to you and a catalyst for change.
So why have natural gas prices shot up so startlingly? Again, we’ve written a lot about the new market dynamics driving prices up, and it, too, is a classic story of supply and demand. One important wrinkle on it, however, is that natural gas has emerged as the “fuel of choice” of the energy transition. It’s powering more and more electricity production as the world tries to wean itself from highly polluting coal and switch over to renewables. One big problem, however, is that those lows of a year ago, while a boon to energy buyers, were awful for energy producers, so production fell – dramatically – fueling today’s problem.
One more tidbit for you, and I’ve learned this through experience: when markets go through convulsive changes like this, it can take years to get back to normal. For example, it took over two years for markets to fully recover from the Polar Vortex of 2014. I am not “anti-hope,” but the smart money is on natural gas prices continuing to trend upward, with the prospects of returning to last year’s lows dim, if not non-existent. That means you need to gird yourself – and your operations – for the reality of higher energy costs.
- Process Is King
I want to get back to my point about “being surprised” by today’s rising natural gas prices. First, while I’ve got your attention, don’t be surprised if natural gas prices rise from $5.00 and $6.00/MMBtu to over $10.00 if we have a cold winter in the U.S.
Awful, yes. Painful, yes. But don’t let that be your main takeaway.
Instead, let me share something else with you. We are in the market every day on behalf of clients, and I can tell you the prices for 12-24 month strips are in fact lousy by recent comparison. But there is relief if you can go out farther – I’m talking 2023-25 and beyond. Dollar-cost averaging will dull the impact of skyrocketing natural gas prices if you go out today with a competitive process and enter a long-term energy contract.
But what we’re really talking about here is hedging. So, if you are just discovering that you are only hedged through 2021 or 2022, it’s time to take a hard look at your energy procurement process. A great process, like the one we deliver at Transparent Energy, will always be looking at current market conditions and forecasts for the future to help you avoid getting caught off guard when energy markets behave, well, like energy markets often do – i.e. with volatility.
Again, if your current energy procurement process, or lack thereof, doesn’t have you hedged well into the future, you have some hard questions to ask. The biggest one is Why?, but I’m also going to delve into the How.
- Gain a Technology Advantage
One of the biggest trends reshaping the enterprise, turbocharged by the pandemic, is digital transformation. I know a lot of people are getting tired of that term, but the reality is that most industries have, by necessity, upped their digital game to streamline a majority of their processes.
I still scratch my head that many large commercial and industrial companies and institutions that leverage the cloud across many vital functions of their operations still buy their energy like it’s 1999. Even if you have the best energy team working on your behalf – and many don’t, still relying on brokers with limited process, technology, and supplier relationships – if you aren’t using a modern-day platform, you cannot extract the best price from the market.
Malcolm Gladwell got it right. At Transparent Energy, we’ve run over 10,000 energy pricing events – online auctions – to help customers see how the market prices their load (think natural gas, power, and renewables – and every variation of terms imaginable) and then transact on the offer that best fits their pricing parameters and risk tolerance (back to hedging).
And it does take 10,000 tries to MASTER energy procurement. Just this week we worked with a large private equity client who had sole sourced energy (i.e. worked directly with a supplier) for some of their holdings prior to the recent price spikes. Our process and online auctions attracted a dozen suppliers and spurred over 100 bids, driving the winning price down to nearly what the client had paid prior to the spike. They were impressed. We got right back to work on bringing their next load to market.
These aren’t unprecedented times. We’ve seen, and successfully transacted in, worse energy markets. But the lessons of the past are potent and must be heeded. If you haven’t already, it’s time to up your energy game.
Contact Jonathan Le at firstname.lastname@example.org to see how Transparent Energy can help your business up its energy game in the face of rising energy prices.
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