Industries Challenged By Wild Energy Cost Swings

Jonathan Lee

As commercial energy consumption is concerned, our recently-wrapped 2015 Energy and Sustainability Predictions survey paints a picture of heightened cost consciousness. On the heels of an especially volatile year in supply price movement, energy once again ranked as the top opportunity for cost savings and efficiency gains recognized by our survey pool.

The growing concern around the cost of energy is a global phenomenon. In February 2014, energy price volatility replaced global climate change as the “number-one critical uncertainty driving the world energy agenda,” according to the 2014 World Energy Issues Monitor released by the World Energy Council.

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While we’ve experienced an energy cost reprieve heading into 2015, our survey of more than 500 North American energy, sustainability, facility, and finance professionals indicates healthy skepticism that low oil prices are here to stay. Most of the recent price declines we’ve seen are a direct result of the Organization of the Petroleum Exporting Countries’ (OPEC) November announcement to maintain current production levels. The global economic growth outlook is also driving weak demand for petroleum products, leaving global oil markets oversupplied. This oversupply, coupled with OPEC’s maintenance of current production levels, puts pressure on non-OPEC producers to reduce production to balance the market.

But the past 24 months of energy price volatility we’ve experienced has hardened industry energy and finance professionals. This year, 60 percent of respondents to our survey expect energy prices to increase in 2015. As sure as the pendulum has swung in recent months, the high energy bills and subsequent budget woes that organizations suffered at the hands of supply price swings in 2014 are still fresh in our minds. Last year, our survey showed that nearly a third of respondents weren’t prepared to handle supply price movement, resulting in stressed utility budgets.economic growth outlook is also driving weak demand for petroleum products, leaving global oil markets oversupplied. This oversupply, coupled with OPEC’s maintenance of current production levels, puts pressure on non-OPEC producers to reduce production to balance the market.

The caution indicated by our survey is well-founded, because near-term market events bring the potential for continued energy price volatility in the coming years. Coal plant capacity will continue to diminish at an accelerated pace through 2017 as higher cost coal plants are retired, rather than retrofitted to accommodate new environmental regulations. Most of these plants will be replaced by gas-fired generation, so wholesale electricity prices will become even more strongly correlated to gas. This reality brings with it the increased potential for energy price volatility in the coming years.

To prepare for the continued likelihood of this volatility, energy and finance professionals should methodically track accruals and variances in energy usage and cost on a site-by-site basis. This exercise provides key site-specific consumption data, creating insight into potential future risk and the actions organizations can take to avoid it.

It’s also important that energy budget stakeholders—including procurement, finance, energy, real estate and facilities engineering professionals—are provided clear and frequent intelligence on organization-wide and site-specific energy consumption. Our survey indicates that the expectation for energy price movement varies significantly from one role to the next within any one organization, casting light on a general lack of communication of energy market and consumption intelligence. In the event of both global energy cost swings and regional/site-specific energy consumption anomalies related to weather or plant inefficiencies, the ongoing sharing of this intelligence will prepare the organization to make informed budget adjustment decisions. Planning for the mitigation of potential risk scenarios—such as a late-winter double-digit rise in natural gas prices—will calm the mayhem many experienced in 2014.

Stay informed of changing price drivers and market updates, bookmark Ecova’s Energy Price Hub.

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