How To Protect Your Energy Budget Against Soaring PricesOctober 20, 2021
3Qs with Luke McAuliffe, CEP, President,
Q: With natural gas and electricity prices spiking upwards, what are you hearing from large commercial, industrial, and institutional energy buyers?
In September, we were writing articles about what “$4.00” natural gas prices would mean for large energy buyers, and in October we’ve already seen those prices blow by the $5.00 mark. That’s a 25% increase in just one month! So that’s the reality right now – extreme volatility – and people are freaked out.
The good news is we saw these increases coming and helped thousands of our customers hedge properly, going long while they could to lock in favorable pricing. For new customers, and for those who couldn’t or didn’t hedge properly, there is definitely some hand wringing.
All that said, I strongly believe there is opportunity for energy buyers if they ACT NOW. Put another way, the data and global macro-economic trends point to ongoing energy price increases. So do what you can now to hedge and get your energy budgets in order.
Q: How are you helping energy buyers wrap their heads around this new (high) pricing environment?
It’s funny you say that, because volatile energy markets are nothing new. It’s just that over the past couple of years we had encountered a perfect storm of factors, from high supply and warm winters to the demand destruction of COVID-19, that drove down energy demand – and prices with it (to record lows in August 2020, when natural gas dropped well below $2.00/MBTU). And now that perfect storm has flipped the other way: because natural gas prices were so low, production dropped. Then demand increased as we came out of the pandemic and natural gas became THE bridge fuel of the energy transition. A total “180” in supply and demand dynamics!
It’s important to understand this history to really grasp what is happening now in the market, and what is going to continue to happen into the future. So, let me make just two points here for our readers:
First, you can see it for yourself in every business publication and market intelligence report we and other market watchers write: high energy prices are here to stay. Natural gas is in high demand, because electrification is in high demand, and we still have a ways to go before we will be able to power the U.S. and global economies with renewable energy. That isn’t going to change overnight, so we’ll have years of high demand for natural gas, and that is going to drive prices up, not down.
Second, it’s a misnomer to think of $5.00+/MMBtu – and higher – natural gas as the “new normal.” It’s really the old normal. What I mean by that is it is a mistake for energy buyers to compare the prices they are going to get in the market today to what they got on their last energy contract. Energy prices the last couple of years were an anomaly, not the norm. Don’t get me wrong – they were great – but they aren’t a useful benchmark. They were a two-year gift – one that keeps on giving if you hedged properly – that has now gone away.
Instead, compare any new energy contract you enter into with the one before your last one. That’s the more realistic benchmark. Expecting energy prices to go down every year was never realistic. The faster you accept that, the better off you will be.
Q: So what can large buyers of natural gas and electricity do to help themselves?
Large buyers of energy must accept that the lows of the last two years, a kind of golden age that will be remembered for years to come, are gone and very likely not to come back. Because of that, it is critical to work with an energy advisory and procurement firm with a proven process for going to market and extracting the best price from it.
Expect short-term turbulence. We recently brought a client to market and prices jumped over 25% in the week between our expectations meeting and our pricing event! Be prepared for those crazy swings and for what could be a very hairy winter for energy prices if deep, disruptive cold weather moves in.
But while that all sounds scary, there are opportunities in the market now – again, I mean right now in late October and early November before any winter disruption – to find price relief in the out years of a long-term contract that will keep you hedged beyond 2023, 2024, and even 2025. In those situations, the power of dollar-cost averaging will lessen the sting of what we expect to be the long-term reality of high energy costs.
And, as always, I advise large energy buyers, those with minimum annual budgets of $250,000, to sign up with us now. There is nothing like having an expert on your side monitoring the market every day and finding opportunities that will save you big dollars.
I’ll be discussing these and other ideas, while offering additional practical insights, to large energy buyers, channel partners and associations in a series of complimentary webinars beginning soon. Details follow:
- Energy Buyers webinar, November 9th at 2:00 p.m. EDT: Large commercial, industrial and institutional energy buyers (minimum monthly spend of $20,000/month recommended) are invited to register here or athttps://bit.ly/3FFwx7A to attend.
- Channel Partners webinar, October 26th at 2:00 p.m. EDT: Current and prospective channel partners, please contact Nancy at email@example.com for an invitation to our exclusive Channel Partners webinar.
- Associations webinar, November 3rd at 2:00 p.m. EDT: Associations looking to bring the benefits of energy procurement and advisory services to their members are asked to contact Jane at firstname.lastname@example.org for a special invite to this event.
I hope you can join us.
To sign up for our Energy Market Monthly report, please register here.
To see how Transparent Energy can put the power of market intelligence and online auctions to work for your business in a rising energy-price environment, contact Jonathan Le, Transparent Energy, at email@example.com.