How do I maximize the value of my energy spend? (Or, how do I spend less and avoid roller coaster pricing?)

In Why is my electric bill so high? and What is “Capacity” And Why Is It Causing My Electric Bill To Increase?, we discussed the underlying cause of the increase in the wholesale price of electricity supply and the impact of the additional burden resulting from higher Capacity costs.

 

With the increase in the cost of electricity supply and the impact on the bottom line, more and more electricity users are focusing on how to reduce the cost of powering their operations.

At Worthington Energy Consultants, our primary focus is to maximize the value of our clients’ energy spend.  Certainly, a primary component of value is the cost of the electricity supply.  However, other factors often become important and valuable.   For instance, many of our governmental, charitable and larger corporate clients seek consistency in the unit costs so as to be able to establish and meet long term budget allocations – the adjusting of which can be time consuming and onerous.  Other electricity consumers, such as professional sports teams and universities are also interested in seeking sponsorship opportunities from qualified suppliers.

Reducing the cost of electricity supply

In an increasing cost environment, in most cases it is desirable to lock in a fixed, full-requirements rate at a favorable level.  Energy is the most volatile commodity traded in the world.  While admonitions against “timing” the commodities market are generally best heeded, we find ourselves in a circumstance where locking in a long term fix-rate agreement is our recommendation as the best approach today.  As the energy market recovers from the impact of the dramatic Polar Vortex price increases, a buying opportunity has presented itself.

The chart below, provided by electricity supplier Mid-American, reflects a market that has returned to the traditional model of current year pricing at the bottom of the power curve with each successive out-year becoming slightly more expensive.  The increase in future years reflects market uncertainty and the anticipated retirement of electric generating plants in 2015 and 2016.

 

As was discussed in our last column, 2015 will experience the greatest reduction in the amount of electricity generation since Thomas Edison.  The Energy Information Agency map shows the dramatic impact that these generating plant retirements will have – particularly in Ohio and Western Pennsylvania.

 

While plant retirements began in 2012, the dramatic decrease in the cost of natural gas and coal as power plant fuel sources off-set and masked the increased costs that typically result when supply is eliminated or constrained.  With natural gas prices now stabilizing and the dramatic increase of power plant retirements in 2015 and 2016, the effects will start to be more acutely felt.

Natural gas production in the Marcellus/Utica Shale regions is up nearly 15% year-to-year and is on track to enjoy a record injection into storage.  This increased production is critical given the significant deficit that was caused by the Polar Vortex earlier in 2014.  As the Energy Information Agency chart below demonstrates, the temperate winter has allowed storage levels to be at or near the 2013 and 5-year average levels as we progress through the heating season while recovering from a significant deficit.

 

These factors have produced a favorable pricing environment for electricity in both the near and long term.

Unfortunately, there are some dark clouds on the horizon.

Addressing the longer term, recently Andrew D. Weissman of the respected Energy Risk Report, conducted a detailed analysis of expected and potential weather implications to energy pricing – particularly if the predictions of a repeat of an unseasonably cold winter in the first quarter of 2015 (recall that there were few professional meteorologists predicting the Polar Vortex at Christmas 2013) come to pass.  He also applied the additional impact of changing market fundaments.

Mr. Weissman asserts that there is a window of favorable pricing that will not remain open long.

The importance of enjoying the current favorable pricing is particularly relevant given Mr. Weissman’s further conclusion that “regulatory and industry fundamentals are creating significant upside risk during the next several years.”

How to address Capacity charges

The increases and fluctuations in Capacity charges between June 1, 2014 and May 31, 2018 are both dramatic and problematic.

In order to bring some stability to electric supply unit pricing, we have been recommending longer term agreements to help “smooth” the impact of the Capacity increases.

With a fixed, full-requirements rate, the Capacity charges are baked into the total amount per kilowatt hour for which you are contracting.  This will assure that the amount you pay per kilowatt hour is consistent throughout the term of your contract.

ALERT! WITH INCREASING FREQUENCY WE ARE SEEING RATES THAT ARE “PASSING THROUGH” CERTAIN CHARGES, MAKING YOUR EFFECTIVE RATE HIGHER THAN THAT QUOTED. IN THE WORLD OF ELECTRICITY SUPPLY, IF IT APPEARS TOO GOOD TO BE TRUE, IT IS!

For some clients, there may be an ability to reduce the actual Capacity charge paid.

The PJM determines the Capacity charges by using the five highest usage periods (almost always the late afternoon) from the prior year.  Worthington is able to provide alerts to clients on days predicted to be among those likely to be considered by PJM.  If the client is able to reduce electric demand during these days, there is a likelihood that Capacity charges may be reduced.  (Please contact us to receive more information if you believe this may be beneficial to you.)

Summary and Recommendations

There is a limited window during which the electricity supply market is providing favorable and beneficial pricing.

Industry fundamentals and potential adverse weather circumstances could dramatically drive up the price of electricity in the mid and long terms.

The potential downward pricing opportunities are dramatically outweighed by the significant potential and dramatic price increases.

Recommendations:

1. Investigate pricing opportunities for your near, mid and long term electricity needs.
2. Explore the longest term available (generally impacted by client credit evaluation).
3. Execute on your decision.

Fred J. Graft (fgraft) is President of Worthington Energy Consultants. Please feel free to contact him at 614-989-3030 or fgraft@worthingtonenergyconsultants.com if you have any questions regarding your energy spend.