Potential Utility Price Increases & What to Expect
When it comes to market movers and utility price increases, the last thing anyone wants to hear is the doomsday phrase “prices are going up!” Nonetheless, market volatility and utility price to compare (PTC) increases do happen, and in fact are currently occurring in the market due to a wide variety of factors from natural gas production levels to the approaching winter. But how those increases play out on a local level, and even more so at the hyper-localized level for your business can vary greatly depending on your current and future energy contract. Let’s take a look at the potential utility price to compare increases on the horizon, and how that could affect your business.
What Is a Utility PTC?
Many utility companies provide a PTC, or a Price to Compare their default energy supply rates to alternate suppliers for their customers. Simply stated, the PTC is a way for customers, or in this case for your trusted energy consultant, to compare prices. Ideally, this information is used to help you lock in your energy contract during the opportune time, but only allows for a few months of expense planning.
Currently, many utility PTCs are increasing for three- to six-month terms. It is important to know that while PTCs are increasing, there is no guarantee where the prices will go, which is why it can also be helpful to know the factors that help determine where pricing will land.
You’ll hear us say this often, but the general rule of thumb is, “Where Natural Gas Prices Go, Electricity Prices Follow.” Natural gas has the largest influence on electricity prices because most newer power plants use natural gas to produce electricity. Moreover, plants called into service during times of higher demand, known as peaker plants, nearly always use natural gas.
Key Takeaway: Even though your system operator is procuring power from all different types of sources—hydroelectric, wind, solar, nuclear, gas—the amount you pay per kWh is determined largely by the current price of natural gas in your region as well as how and when the utility procures the power. Utility rates often lag the wholesale energy markets and rising natural gas prices today often leads to higher electricity prices tomorrow.
So what affects natural gas prices? A variety of factors, including:
• Natural gas production.
• Natural gas storage.
• Pipeline capacity.
• New this year: COVID-19.
Rolled together with demand factors, natural gas and ultimately electricity prices can dramatically rise or fall as a result. As we inch closer to winter and drilling companies scale back due to financial pressures brought on by low oil prices, natural gas prices have started to rise dramatically. In fact, the U.S. Energy Information Administration expects natural gas spot pricing to average over 50% higher in 2021 than in 2020.
What to Expect
With natural gas prices increasing as a result of weather and production, expect electricity rates to follow. While there is no crystal ball to predict exactly where prices will go, price volatility is expected and can be avoided with a smart energy management plan in place for your business. You can potentially avoid paying more money for your electricity by shopping and switching to a fixed-price product.
Key Takeaway: Energy prices for the winter carry a premium for both utilities and suppliers. However, competitive suppliers can stabilize your energy-related operating expenses for as long as five years, blend in lower cost months/years and offer creative approaches that allow you to hedge (fix) some costs while allowing access to potentially lower market-based prices.
What Could Continue to Drive Utility Rates Up?
Of course, the other elephant in the room is the effect that COVID-19 will continue to have into 2021. Again, there is no crystal ball, but what we do know is that some utilities saw as much as a 20% decline in Q2 electric consumption. Utilities are generally deferring costs for now, but many are requesting approval to set up a “regulatory asset” to track additional expenses as a first step toward cost recovery of direct COVID-19 expenses. The question remains of course as to whether lost revenue will also be recouped. While it remains unclear what the impact to commercial and industrial rates will be, you can expect rates to vary from utility to utility. Also expected is a “double-heating effect” in which the increased residential demand from more people being at home pairs with the fact that many commercial offices are still open—an impact that could continue to drive prices upward in many areas.
Key Takeaway: COVID-related uncertainty and changing weather forecasts are expected to increase price volatility.
At APPI Energy, our proprietary database of daily electricity supplier prices enables our consultants to compare historical and real-time prices in every deregulated energy market. Decisions about when to buy and contract length are based on data, analytics, and expertise.
AFS has partnered with APPI Energy to provide our Corporate Members with data-driven solutions designed to make their businesses more profitable by reducing their electricity and natural gas supply costs. Drew Pangborn