Energy Prices Are Moving Up – Now What?

The year 2012 brought us incredible ten-year lows in both electricity and natural gas prices.  Drilling advancements such as hydraulic fracturing (or “fracking”) made it possible to access deeply buried oil and gas resources in previously inaccessible shale formations, creating a glut of natural gas on the market.   As consumers, we enjoyed unprecedented price drops and a supply that far overshadowed the demand.

That was two years ago.  Times have changed, and the demand for all of that previously untapped natural gas has slowly started to catch up with the supply.  As 2014 draws to a close, natural gas prices have been creeping up; mostly the result of increased usage at power plants and industrial and commercial factories – as well expectations of future natural gas exporting.

Another factor that drove prices up?  The bitterly cold winter of 2013, which further increased the demand for (and depleted the supply of) U.S. natural gas resources.

Source: EIA (U.S. Energy Information Administration)

The “New Reality” of Energy Prices

To energy buyers and energy procurement specialists, the budget-friendly 2012 energy prices are nothing but a distant memory.  The conversation has now turned to how best to prepare already-strained budgets for inevitable increases in energy costs.

The good news is that, with a small amount of research and preparation, electricity procurement doesn’t have to mean an out-of-control budget.  Here are five proven ways to deal with the “new reality” of rising energy prices – while keeping the budget under control:

1. Be Proactive – Don’t Wait:  In most scenarios, the normal course of action for energy procurement involves waiting until six months or so prior to expiration of a contract to start “shopping around” for a new supplier or contract.  In today’s market, however, it’s more likely that you’ll find your greatest opportunities for reducing electricity costs if you start weighing your options as early as 24 or even 36 months ahead of your contract’s expiration date.

Unfortunately, nobody owns a crystal ball, and nobody can predict what energy prices will do in the future.  The best option is to act early and make educated choices based on a combination of historical movements and daily wholesale market price intelligence.

2. Don’t Shy Away From Long-Term Deals:  It’s a common practice among energy buyers to secure shorter contracts when prices are going down and longer contracts when prices go up.  This strategy provides more budget certainty and manages price exposure, which allows you to take advantage of market movement.

So why is it so hard to sign that three-year contract, even though we can clearly see prices are going up?  It’s a natural reaction:  When you see that your energy costs will be higher in the coming year, the natural reaction is to curb the pain by making it short-lived.  In other words, many procurement specialists will try to reduce electricity costs by signing a shorter contract in the hopes that prices will be lower in the future.  In reality, though, in this type of rising market, longer contracts stand a greater percentage chance of delivering long-term savings – ultimately providing budget protection and stability.

3. Avoid “Paralysis by Analysis”:  Discussing strategies for a rising energy market can often lead to rather lengthy analysis – both by electricity procurement specialists and their direct supervisors.  This can lead to a situation where, instead of taking action, the  energy procurement team simply decides to wait and check prices again the next month, and the next month, and the month after that . . .

A historical examination of rising markets tells us this strategy will tend to yield higher prices and more frustration.  The end result is that you end up in a non-stop cycle of “wait-and-see” analysis.  Nothing happens, and eventually you are forced to act because your contract is about to expire.  And at that point, you don’t have many options.  You have to take what the market gives you.  This does not mean that analysis is unnecessary – but it does mean that you should know when to stop analyzing.  Assess what is happening, and then do something.  This is a key rule to remember in a rising market.

4. Monitor the Markets:  Even though a market is rising, that doesn’t mean that it is a smooth upward trend line.  It’s more likely that you will see large spikes and dips in this upward path.  This is also the case if the market is trending down.  This is all a result of the incredible volatility of energy commodities, especially electricity and natural gas.  So, even though your organization may have decided that it will act early and decisively to renew its energy contract, you still need to monitor market movement to make sure agreements are inked during favorable pricing windows.  In other words: Don’t sign a contract during a price spike.

While that seems like an obvious thing to say, it’s actually quite difficult to implement unless you are closely connected with wholesale market intelligence.  By monitoring the market, you can ensure that you are able to make the best decision possible based on an educated analysis of wholesale market price movement, regardless of which direction the market is moving.

5. Share the Full Picture with Your Organization:  If you’ve been in the energy procurement or energy consulting business for an extended period of time, you know that energy buying decisions can be affected by outside factors, such as office politics or a misunderstanding of the markets.  As an energy procurement specialist, you can help your organization make the best decision by showing them the full historical reasoning behind your recommendation.  You want energy procurement to be a logical move – not a debatable choice where sides are taken.

You can do this by showing a clear progression of prices, as well as the impact of those prices on the budget.  As the upward trend becomes apparent, the choice of contracting during an early dip in prices to avoid a later rise becomes a conservative move to protect budgetary costs.

Surviving – and Thriving – When Prices Go Up

While it is frustrating that your energy budget most likely will be bigger in 2015, 2016, and even 2017 than it was in 2014, that doesn’t mean you can’t employ strategies to take control.  With a little research and preparation, you will not only survive during a rising market, but may find your energy programs thriving. And as prices come back down (which they inevitably do), you will be in a much better position to secure and lock down those savings, as well.