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3Qs with Luke Nemes, CEP, Director of Energy Procurement & Market Intelligence, Transparent Energy

 

Q: What is going on with rising natural gas prices and, by extension, electricity prices?

The short story is natural gas prices have surged past the $4.00 mark for the first time in several years. This should be a major concern for all commercial, industrial, and institutional buyers of natural gas, and, because electricity prices are increasingly correlated to that of natural gas, for all buyers of power.

Q: Why is this spike in prices happening? Why has natural gas surged past the $4.00 mark? Is this, hopefully, just a temporary blip?

Unfortunately, we have been forecasting this surge in natural gas and electricity prices for over a year, as have other major players like Morgan Stanley and Raymond James. In fact, we have been warning our clients, channel partners, and prospects to avoid complacency (i.e., that the historic lows of 2020 wouldn’t last) and urged all parties to “buy now” and “go long” for the last two years.

I’m a Market Intelligence guy through and through, and I love to go into detail, which you can immerse yourself in in my Energy Market Monthly Reports­­. But for now, I’ll spare you the rig counts and simply summarize the situation. Natural gas prices have rocketed up – 40% since April 2021 and more than 100% year over year – and electricity prices with them, across the U.S. and around the world. This has happened, and is continuing to happen, for several key reasons:

1. The market is undersupplied through the winter and well into 2022.
2. The current natural gas storage trajectory is on track for the second-lowest end of injection-season of the past decade.
3. 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.
4. LNG export volumes (and prices) continue to set new records.
5. Natural gas producers are continuing to hold the reins tight on production.
6. Natural gas is being promoted as the world’s “bridge fuel” of the energy transition.

The irony is we’ve known about all of these things and loudly proclaimed them to anyone who would listen. Those who have listened took advantage of the historic market lows and hopefully went out as far as they could, i.e., entering into long-term natural gas and electricity contracts.

For those who bought, but didn’t buy long, and for those who didn’t buy at all and are nearing the end of their current competitive supply contract, there are some sobering decisions ahead, because all those forces mentioned above that drove natural gas prices above the $4.00 mark are continuing to run pretty much unabated.

These prices are not only here to stay, they are likely going higher.

Q: So what can large buyers of natural gas and electricity do to help themselves?

I think the key thing is not to panic. In my most recent Energy Market Monthly Report, I explore the theme of “inertia.” One manifestation of inertia in energy buying is to not act at all. When a market is running up, and the fundamentals point to further rises, not acting is your worst possible option.

Here is my concrete advice, and it’s what we as a company, Transparent Energy, recommend.

1. Get ahead of your energy needs by partnering with a market expert well in advance of your current contract expiration date.

 This is my best overall advice. 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 when they occur. At Transparent Energy, we recommend you retain us 12-18 months in advance of your contract expiration date, so that we can 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. And right now, that’s not tasty.

And it could have been avoided.

Speaking of avoided, did your current energy broker tell you a year ago that energy prices would spike in 2021? If you don’t use a broker, did your energy team advise you of this existential sea change in energy prices?

If not, you should be working with us.

2. 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.

OK, what does this really mean? It means a couple of things. First, you’ve got to adjust your mindset. 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 in a bull market.

Right now – and I mean right now – there is still opportunity to guard yourself against the looming threat of $5-$6 natural gas prices in the out years of natural gas and electricity contracts. Going long now makes sense if you can accommodate the new reality of high gas prices being a long-lived phenomenon and do so quickly.

3. Procure Your Energy via Transparent Energy’s Online Auctions

Any energy broker or team can look like a hero when energy market prices plummet. Value and excellence shine brightest in difficult markets. Along with providing you the best advice based on the best market intelligence, we at Transparent Energy help you extract the best price possible in the market by using the best tool: our online auction. When multiple suppliers bid in real time for your energy contract, prices are driven down and supplier margins are compressed. Simply put, when energy supplier compete for your business on our online auction platform, you win!

When market fundamentals are stacked against you, gaining such a win is not just a nice to have, it is essential to your bottom line.

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 jle@transparentedge.com.