June 23, 2022
The energy market has continued to experience a great deal of price volatility and unpredictability. Our analysis shows there is a greater risk of prices increasing rather than decreasing based on current market fundamental indicators. These higher prices are being driven by;
↓ Natural gas storage sitting at 22% below last year’s level and 17% below the 5-year average level1
↑ Increased demand due to LNG exports, outpacing supply ↓ by 4.3 Bcf/d1
↑ Summer weather forecasted to be one of the top 5 hottest summers on record2
“The cost of natural gas is a significant driver of electricity prices because it often acts as the marginal (highest cost) fuel of generating units that operators dispatch to supply electricity.” – EIA.gov
Depending on the region, both natural gas and electricity generation costs have escalated. While the EIA is forecasting increased natural gas production, that production is already factored into the current market pricing, so there will not be a positive impact on future energy prices because of it. The pace of storage refill during the April-October timeframe plays a primary role in the direction the market moves. Lower than expected production or hotter than average summer temperatures (which NOAA is forecasting) could put further pressure on next winter’s pricing.
The energy market is dynamic and complex. Given current volatility and risk of further upward price movement, we caution energy buyers on waiting until their contract renewal time to review pricing and strategy. Rather, below are some ways you can combat increased costs and uncertainty.
In a volatile market, it may make more sense to build into your price over time through a layered hedging approach. This way you don’t have to lock in your full energy requirements at one price. Rather than trying to time the market to fix your energy price all at once, you can execute a procurement plan that allows you to take advantage of future buying opportunities without fully exposing yourself to price risk. This strategy views energy needs over the long term and allows you to purchase varying blocks of energy at different times over the course of multiple years. This provides your organization the flexibility to adjust over time to integrate renewable energy plans and take advantage of energy reduction measures such as efficiency upgrades. By electing to take a layered hedging approach you can slowly move to a 100% fixed energy contract.
For more energy-intensive customers in the commercial and energy space, high energy prices and market volatility could lead to companies needing to reducing activities and manufacturing. This may be one of the most immediate ways an organization can help mitigate energy costs. However, a reduction in output and production could also lead to continued shortages and worsening an already strained supply chain. Energy conservation is a valid form of reducing energy costs, but in times of extreme price volatility, the financial benefits and rate by which you conserve energy and costs is far greater with a proactive energy strategy behind it, including procurement.
The energy market is extremely complex, even in times of lower volatility. By aligning with an energy expert, you work with professionals who understand and can help navigate you through the various complexities of an extremely volatile energy market. Working with not only an experienced energy expert, but with a well-established and financially secure supplier, will also provide additional security knowing they have maneuvered through many years of price volatility. These energy experts can help outline potential risks and impacts different strategies can have on your organization’s operation and bottom line.
Well-executed energy strategies can help companies mitigate price risk, budget and forecast more accurately, and enjoy flexibility. NextEra Energy Services is working with customers like you, providing real-time insight and developing a cost-efficient energy strategy that achieves business objectives and evolves alongside a changing market. Contact us today to schedule an initial meeting to review your energy needs.