Supply chain decision-makers can be forgiven if energy prices had fallen off their radar screens. There’s been a global pandemic to worry about, various raw materials and finished goods shortages to manage and energy prices were at record lows for most of 2020.
But, if your current energy supply contracts are ending soon and you are getting back into the market, you are in for a big surprise – and not a good one. Since last year’s record lows, natural gas prices have doubled, reaching multi-year highs.
And, they show no signs of letting up.
This is important to you whether your facilities use natural gas or not because electricity prices are increasingly correlated to that of natural gas (i.e., more and more power plants now run on natural gas).
So what exactly has happened, and what can you do about it?
First, “the why?”
It’s so easy to take energy prices for granted when they are low, especially when they are low for a long time as they have recently been. Yet, energy prices are fundamentally volatile. Take them for granted at your own risk.
So why are natural gas prices rocketing up – more than 50% since April 2021 and more than 100% year over year – and electricity prices with them, across the United States and around the world? Here are a few 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.
Those who have adjusted accordingly have taken 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 did buy but didn’t buy long or 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. That’s because all of the forces mentioned above that initially drove natural gas prices above the $4 mark, then $5, are continuing to run pretty much unabated.
These prices are not only here to stay, they are likely going higher.
So what can you do about it?
Don’t panic. If you are heading back into the market to secure electricity contracts for your facilities, yes, it’s going to hurt a little, but don’t let the new pricing landscape paralyze you. When a market is running up and the fundamentals point to further rises, not acting is your worst possible option.
Here are a few tips:
1. Get ahead of your energy needs by partnering with a market expert well in advance of your current contract expiration date.
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. Retain a partner 12-18 months in advance of your contract expiration date, so they can pounce on any market softness to 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.
But, I’m not here to say “I told you so.” Procrastination and wishful thinking are part of human nature. But, you can change, and do so now so you don’t find yourself in this position again in another 12-60 months.
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.
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.
Right now, there is still opportunity to guard yourself against the threat of $5, $6 and even higher 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. Unbundle energy procurement from other energy services and procure your energy via an online auction.
How you buy energy really matters, especially in a difficult pricing environment. If you are allowing a large energy services company (ESCO), the kind of firm that pays your energy bills and changes your light bulbs to buy your energy supply, you are making a tragic mistake.
Energy procurement is where the money is. You’ve heard about the 80/20 rule? In energy, it’s closer to 90/10, and the 90 is in energy procurement. The price you pay for the commodity is the biggest factor in your energy budget, so it is essential that you use the best process to extract the best price from the market. The best process involves online auctions to force suppliers to compete aggressively to win your business.
Most ESCOs don’t offer auctions, and those that do do them half-heartedly. The competitive dynamics of their pricing events are lackluster, if not non-existent. Don’t let the convenience of an ESCO’s one-stop shopping value proposition torpedo your operations budget. Instead, work with an energy procurement specialist, one who uses online auctions and has a track record of increasing supplier participation in its pricing events. Healthy competition is your friend in any energy pricing environment, but it is your best friend when prices are high and every penny counts.
Any energy broker or team can look like a hero when energy market prices plummet. Value and excellence shine brightest in difficult markets. When multiple suppliers bid in real time for your energy contract, prices are driven down and supplier margins are compressed – a win for you and your stakeholders.
And, when market fundamentals are stacked against you, as they are today, gaining such a win is not just a nice to have, it is essential to your bottom line.