The Big Chill: Cold Weather & Higher Prices Making Energy Expenses Spike

Ian Bowman

After two significant blasts of polar weather and a deluge of newsbytes about wholesale energy price spikes affecting parts of the U.S., many companies are bracing for uncomfortably high invoices and preparing how to communicate with stakeholders about energy budget surprises for January and February. Here is a high level overview of the regions that will see the greatest budget impact.

GREAT LAKES/MIDWEST: WILD TEMPERATURE SWINGS DRIVING ENERGY CONSUMPTION UP BY 15 PERCENT

Average temperature swings versus prior periods have been dramatic in the Great Lakes region. The map to the left shows January 2013 with temperatures in the Midwest averaging around three degrees warmer than normal. The map on the right shows January 2014 coming in 6 to 8 degrees colder than a normal year, for a total year over year difference in January of 9 to 11 degrees.

2013-mean-temp-and-2014-mean-temp-anomaly

A sampling of commercial clients with moderate heating loads in the Midwest region shows that energy costs are up in the range of 15 percent due to usage.

Overall, the biggest news story in the Midwest was around propane, which saw shortage pricing even though it is used by few commercial clients. So far, wholesale natural gas and electric rates in the region are moderately elevated, with electric spot prices in the range of $60 to $100 per mWh most days, with the notable exception of January 28th when the Midwest ISO electric “day ahead” market remained above $300 per mWh for much of the day. But with cold weather expected to persist into the middle of February in this region, we may see additional spikes begin to pull the broader average for prices upward.

IN THE NORTHEAST:  SPOT PRICING, COUPLED WITH INCREASED DEMAND, MAY DOUBLE REGION’S JANUARY ENERGY COST

Around Boston and New York City, companies taking variable supply rates from their utility or a third party supplier should brace for invoices that may double from their January 2013 costs. While the temperature was enough to drive relatively modest combined electric and gas usage increases of around 10 percent vs. last January, the increase was enough to cause bottlenecks in natural gas pipelines trying to simultaneously serve the demand for natural gas used in both heating and electricity generation. While some stories hitting the news described natural gas prices as high as $30, it is unlikely that commercial companies will be exposed directly to those spikes. A more indicative comparative price for companies with unhedged natural gas commodity positions is $6 per decatherm last January versus averages closer to $9 this January. On the electric side, spot prices that were closer to $50 per mWh last January averaged roughly $170 per mWh this month.

COMMUNICATING WITH BUDGET STAKEHOLDERS:  CHALLENGES AND OPPORTUNITIES AHEAD

We expect that communications around budget surprises and the value of risk management will be ongoing over the coming weeks and months as invoices roll in and cold temperatures and elevated wholesale prices remain in place throughout much of the eastern half of the U.S. into February. For companies with a conservative contracting strategy and affinity for fixed prices, the next few months represent a strong opportunity to highlight the value of that approach for stakeholders. Stay tuned as Ecova continues to provide additional analysis in follow-up posts to help energy cost managers and other budget stakeholders understand the impacts of this event and risk management strategies to manage future exposure.

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