Preparing For Volatile Energy Prices

Ian Bowman

Even though it’s midsummer, many US-based businesses are still recovering from the budget impact of last winter’s energy prices.

It’s tempting to attribute last winter’s energy price volatility to anomalous, extreme weather and proceed with business as usual. That’s a risky strategy. The winter of 2013-2014 offers valuable lessons for future winters, even if the fall chill still seems far off.

THE LESSONS OF LAST WINTER

The weather made headlines last winter, for good reason. Major parts of the country experienced excessive snow and cold, and winter lasted much longer than usual in many parts of the country.

But if you look closely, the weather wasn’t uniformly cold. On parts of the Eastern seaboard, the cold was unusual but not extreme – perhaps a once-a-decade pattern of cold. In the western states, it was warmer than average. So although the weather was unusual, we could easily see other winters that put similar strains on fuel sources.

statewide-temperature-ranks

The energy price volatility was not due to weather alone. Weather-driven demands on energy exposed pockets of risk in the market―much like a low tide will expose hidden obstacles. The weather may be warmer, but those risks remain in the markets, and may lead to continued volatility in the future.

Looking at the Northeast, for example, the transition from coal to gas is happening unevenly.  More coal plants (and one nuclear plant) are closing during the course of 2014. The expectation is that remaining gas plants will take up the slack, but  natural gas pipelines are already at full capacity in some places. And natural gas storage is already at a deficit, well below the five-year minimum range.

eia-working-gas-in-underground-storage

It’s reasonable to assume that price volatility will be back in the coming winter, with regional variations.

ENERGY PRICE VOLATILITY GETS ATTENTION – BE READY FOR IT

Even if you’re recovering from the budget after-effects of last winter, there are steps you can take today to prepare for energy price volatility going forward. When high utility bills start blowing out budget estimates, you’ll need to be ready with answers about what’s happening and why, and strategies for dealing with it.

  1. Track accruals and variances regularly, even if you’re not currently required to do so. And track both supply side and demand site variances (usage and prices) on a site-by-site basis, as local conditions will be a major factor in utility costs. This will give you the essential insight into what’s happening where, as well as potential forward risk.
  2. Engage with key stakeholders in the energy budget, including procurement, finance, energy, real estate, and facilities engineering. Give them clear and concise information about what’s happening and why. Have the discussions about value at risk and possible scenarios – what will you do if natural gas prices rise by 10 percent in November? How can you mitigate the risks.
  3. Reforecast when necessary. Remember that the lagging effects of price pass-throughs may sustain the impact of past market spikes.

WITH RISK COMES OPPORTUNITY

The attention from volatility can be an opportunity if you’re prepared. If you’ve done your homework and identified costs and risks, you can use this opportunity to advance energy management and efficiency initiatives. Price volatility can accelerate the payback on solar initiatives or lighting and HVAC upgrades, for example. For a more detailed discussion about budgeting and energy price volatility, watch the Ecova webinar Energy Budgeting in Volatile Markets.

Take advantage of Ecova’s energy insight resources:

 

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