Utility Prices on the Rise (and How to Mitigate those Costs

Utility Prices on the Rise

According to the Energy Information Administration (EIA), the cost of natural gas for power generation more than doubled in 2021, accounting for much of the rise in electricity prices. A variety of factors have contributed to the rise in natural gas (and subsequently electricity) prices, and while no one can predict where prices will go in the coming months, what you can do is take the right steps to have an effective energy management plan in place.

What’s behind the increases?

A combination of Russia’s war in Ukraine and weather are driving U.S. natural gas prices to some of the highest points in years. Low natural gas storage levels, paired with the increased demand both domestically and overseas are contributing, and while a mild winter and an end to the war in Ukraine could bring prices back down, the current landscape has been yielding high power prices.

A key factor to keep top of mind is the fact that electricity is closely tied to natural gas. The general rule of thumb is that where natural gas prices go, electricity prices follow. Retail electricity prices are largely driven by natural gas prices, which are driven by several related factors, including supply & demand. We are currently experiencing both rising demand AND a tighter supply.

For example, in Illinois, MISO capacity rates jumped nearly fiftyfold after multiple coal plant operators announced early closures. The Midwest sub-region cleared at $236.66/MWd vs. $2.88/MWd in the South region.

What does it mean for businesses in deregulated states?

As a business in a deregulated state for electricity and natural gas, you have options, including shopping for a more competitive supply agreement.

To start, consider:

• Locking in sooner rather than later: One approach is to get out ahead of the market. Generally, we recommend that our clients at least test the waters of the market 12 to as much as 24 months before their existing contract ends. While we do not know if prices will be higher or lower in the future, what we do know is energy market volatility increases as the start date gets closer, primarily due to the impact of weather.

• Looking to the future: Additionally, looking further out can be beneficial as well. The “outer years” still represent a good buying opportunity and an effective way to combat higher near-term prices.

Besides securing the best price, what other factors should I consider?

As an organization in a deregulated state with energy choice available to you, the first place to start is by assessing your current power supply contract and pricing. A few questions to start with are:

1. Are your contract terms favorable?

2. Are you seeing unexpected charges or line items on your invoice?

3. Are you hedging against market volatility?

4. Have you secured the best pricing and/or contract length?

What if energy choice is not available to my business?

By taking steps to reduce your usage and demand, you can lower your overall energy expenses. Local distribution costs are impacted by your peak demand levels so reducing the peaks can bring significant savings. Additionally, you can:

• Reduce demand: The lowest priced kilowatt hour is the one you don’t use. By reducing your usage and reducing your demand, you can take more control of your future energy expenses even though prices are high.

• Explore efficiency and sustainability projects: Taking steps to increase energy efficiency provides a viable path to reduced energy usage. Energy optimizations include HVAC upgrades, lighting retrofits, advanced metering technology, weatherization of facilities, and peak load scheduling.

A great place to start is by talking to our team at APPI Energy. Our data-driven approach coupled with our proven, 26year history and extensive experience working with banks in Illinois, allows us to provide custom solutions for navigating the ever-changing energy markets.

Contact the IBA’s dedicated energy consultant, Jamie Polend, today at: jpolend@appienergy. com or 667.330.1158.