FPSA Members: Get in Front of Your Energy Needs Now to Mitigate Rising PricesJanuary 24, 2022
“Energy and sustainability have emerged as top budgetary and reputational concerns for our members, providing us an excellent opportunity to introduce new value-added services that will simplify the lives and improve the bottom lines of our members.”
– David Seckman, President and CEO, FPSA
Food-processing suppliers can be forgiven if energy prices had fallen off their radar screens. There’s been a global pandemic and supply chain bottlenecks to worry about and energy prices had languished, at least prior to 2021, at or near record lows.
But, if your current energy supply contracts are ending soon and you are getting back into the market after two or three years away, you could be in for a big surprise – and not a good one. Since 2020’s all-time record lows, natural gas prices have more than doubled, reaching multi-year highs. And, they show no signs of coming back down.
Consider this summary from the Energy Information Association (EIA), an independent government agency monitoring U.S. energy markets, in its January 2022 report, “Wholesale electricity prices trended higher in 2021 due to increasing natural gas prices”:
Natural gas prices have remained relatively low in recent years; the cost of natural gas delivered to electric generators averaged $2.40 per million British thermal units (MMBtu) in 2020. However, natural gas prices trended higher over the last year. The delivered cost of natural gas to electricity generators grew from $3.19/MMBtu in January 2021 to an estimated $5.04/MMBtu in the fourth quarter of 2021.
That’s a year-over-year increase of more than 30% from 2020 to 2021, and nearly a 60% in-year jump over the course of 2021. For all energy consumers, those are painful spikes. For energy-intensive industries like food-processing-suppliers, they pose an existential threat.
While the first month of 2022 has offered some relief, higher prices and increased volatility appear to be the new normal, one smart energy buyers need to adjust to.
“In 2021, the NYMEX monthly settles ranged from $2.47/MMBtu – $6.202/MMBtu. The resulting $3.732/MMBtu price spread (and implied volatility) is, in a word, extreme.”
So what exactly has happened, and, more importantly, what can you do about it?
First “The Why?”
It’s easy to take energy prices for granted when they are low, especially when they are low for a long time as they have recently been. Yet, energy prices are fundamentally volatile. Take them for granted at your own risk.
So why did natural gas prices rocket up in 2021 – and electricity prices with them – across the United States and around the world? Here are a few key reasons:
- The market is undersupplied well into 2022.
- The natural gas storage trajectory remains low.
- Gas-to-coal switching, which is used to put a curb on natural gas price run-ups, is tapped out due to coal plant retirements.
- LNG export volumes (and prices) continue to set new records.
- Natural gas producers are continuing to hold the reins tight on production.
- Natural gas is being promoted as the world’s “bridge fuel” of the energy transition.
So, if the forces keeping natural gas and electricity prices high are likely here to stay, what can large energy buyers like the food-processing-supplier industry do to protect themselves?
Tips for Success
First, don’t panic. If you are heading back into the market to secure electricity and/or natural gas contracts for your facilities, yes, it may hurt a little, but don’t let the new pricing landscape paralyze you. When a market is running up and the fundamentals point to further rises, not acting is your worst possible option.
Here are a few tips:
- Get ahead of your energy needs by partnering with a market expert well in advance of your current contract expiration date.
Energy markets are volatile by nature, so you need to get in front of them, monitor them and leverage all the intelligence you can gather and transactional expertise you can muster in order to procure energy at the best time and price to meet your business goals and risk management tolerances.
What this really boils down to is that you need to work with a partner who is in the market every day so you can take advantage of opportunities – i.e., dips – when they occur. Retain a partner 12-18 months in advance of your contract expiration date, so they can pounce on any market softness to get you the best price and product for your energy budget.
When you don’t do this, when you go to market because you have to, i.e., because your contract is about to run out, you become an “order taker,” one who has to eat whatever the market is serving. Sometimes you get lucky, but often you don’t. Don’t be that company. “Hope” isn’t a strategy.
- If you need to buy now because your contract is coming up or if the gains you had locked in during past years’ lows are ending in 2022, try to find softness in the outer years.
When you are buying in a rising market, you aren’t going to “save” money over your past contract. You can, however, still, look for value in the market, i.e., opportunities to make your energy-buying dollar go as far as it can.
Right now, there is still opportunity to guard yourself against the threat of higher natural gas prices in the outer years of natural gas and electricity contracts. Going “long” now, i.e. entering an energy contract for 36 or 48 months, or even longer, makes sense if you can accommodate the new reality of higher gas prices being a long-lived phenomenon and do so quickly.
- Unbundle energy procurement from other energy services and procure your energy via an online auction.
How you buy energy really matters, especially in a difficult pricing environment. If you are allowing a large energy services company (ESCO), the kind of firm that pays your energy bills and makes your energy-efficiency updates, to buy your energy supply, you are missing out on substantial savings.
Energy procurement is where the money is. You’ve heard about the 80/20 rule? In energy, it’s closer to 90/10, and the 90 is in energy procurement. The price you pay for the commodity is the biggest factor in your energy budget, so it is essential that you use the best process to extract the best price from the market. The best process involves online auctions to force a large pool of suppliers to compete aggressively to win your business.
That means working with an energy procurement specialist, one who uses online auctions and has a track record of increasing supplier participation in its pricing events. Healthy competition is your friend in any energy pricing environment, but it is your best friend when prices are high and every penny counts.
Any energy broker or internal procurement team can look like a hero when energy market prices plummet. Value and excellence shine brightest in difficult markets. When multiple suppliers bid in real time for your energy contract, prices are driven down and supplier margins are compressed – a win for your operating budget.
And, when market fundamentals are stacked against you, as they are today, gaining such a win is not just a nice to have, it is essential to your bottom line.
“Our new partnership with Transparent Energy will bring the power of online auctions, backed by the energy expertise and client-service skills of their team, to members interested in saving money on energy, becoming more sustainable, and protecting themselves from energy-market volatility.”
– David Seckman, President and CEO, FPSA
For more information on today’s energy market and the best ways to transact within it, contact
Jonathan Le, Transparent Energy, at firstname.lastname@example.org or 945-218-2185.