Energy Pricing in 2021 – How to Effectively Manage Risk
How did the pandemic impact energy demand?
The closures of office buildings, stores and factories put a definite kibosh on commercial and industrial energy use and demand last year. The International Energy Agency (IEA) noted that it was the biggest decline in electricity consumption since the Great Depression.
What impact does temperature have on electricity prices?
Temperature and weather also have a sizeable impact on electricity prices. The more extreme the temperatures in either direction, the more electricity is required to heat and cool buildings and factories.
What is Biden's energy policy?
Joe Biden has been clear about his plan to go greener. His goals include clean electricity by 2035, increased wind and solar to get the nation to net-zero emissions, and 100% clean energy by 2050. Biden also wants to upgrade millions of buildings and homes to be more energy efficient, plug abandoned oil and gas wells, reclaim mines and make environmental justice a key consideration.
Now that 2020 is behind us, it’s time to start looking ahead into 2021. If you’re a business, property, or factory manager, that likely means procuring electricity for your company in order to power its operations. This can be done by purchasing electricity from retail suppliers or a utility company at either fixed or indexed prices.
That said, like everything else, energy (i.e. electricity) prices were impacted by the events of 2020, namely the global coronavirus pandemic. It is important to note that electricity trades in a similar manner to other raw materials, e.g. oil. U.S. power-plant owners will sell electricity wholesale to utilities in a market overseen by regional operators (RTOs). Utilities then distribute that electricity to their customers. When there is a shortage or surplus of electricity, the prices will rise and fall accordingly. For example, energy prices in the residential sector rose 1.2% in 2020, while prices in the commercial and industrial sectors fell 0.5% and 1.9%, respectively. This was mainly due to COVID-19 lockdowns shutting down the economy and keeping people working from home, rather than in offices.
So, how can you expect to see energy prices trend this year? We’re looking at the different scenarios that might affect prices: The pandemic and electricity demand, temperatures, natural events like hurricanes, and the new Biden Administration’s plans for clean energy policy.
Energy Demand and the Ongoing Coronavirus Pandemic
The closures of office buildings, stores and factories put a definite kibosh on commercial and industrial energy use and demand last year. The International Energy Agency (IEA) noted that it was the biggest decline in electricity consumption since the Great Depression. New York City saw the greatest drop in demand – power prices averaged $16.57/MWh in early May, according to S&P Global Platts, a decline of more than a quarter from the start of 2020.
The COVID-19 pandemic is expected to persist into 2021, and while the vaccine will likely lead to a reduction in cases, many large companies like Google and Ernst and Young have announced they won’t reopen their offices until the summer or fall. Despite this, the EIA predicts that energy demand will rebound slightly this year, and that is reflected in their predictions for 2021 electricity prices. So, once offices begin reopening and lockdown restrictions are gradually lifted, expect electricity prices to climb again.
Temperature and Weather
Temperature and weather also have a sizeable impact on electricity prices. The more extreme the temperatures in either direction, the more electricity is required to heat and cool buildings and factories. According to long-range weather forecasts, 2021 Winter temperatures in the Atlantic corridor will be above normal, with the coldest periods early and mid-January and Spring and Summer temperatures will be hotter than normal. Meanwhile, the Atlantic hurricane season, which affects electricity prices by disturbing oil drilling in the Gulf of Mexico, is set to begin in early August. Rounding out the year, September and October will be cooler than normal. Keep these estimates in mind when determining what your electricity costs will be.
Biden’s Clean Energy and Climate Policy
President-Elect Joe Biden has been clear about his plan to go greener. His goals include clean electricity by 2035, increased wind and solar to get the nation to net-zero emissions, and 100% clean energy by 2050. Biden also wants to upgrade millions of buildings and homes to be more energy efficient, plug abandoned oil and gas wells, reclaim mines and make environmental justice a key consideration. Depending on how fast Democrats can get started with their initiatives and how much friction they face in a divided Senate, this could be disruptive to the natural gas market. Any additional economic stimulus package could drive demand higher as well.
How EnergyWatch Can Help You Manage Risk
Energy risk management calls for identifying, evaluating, and analyzing risk associated with unpredictability and volatility in the energy commodity and regulatory markets, as well as alignment between energy product choice and operational strategy. Managing this risk can guard against negative financial and operational impacts and optimize performance and payback for both ECMs (energy conservation measures) and DERs (distributed energy resources).
Many companies have moved away from managing energy risks one at a time and are now taking a more comprehensive view of the energy risk landscape. As future fuel costs and regulatory changes remain uncertain, your business should develop techniques and strategies that allow flexibility in a somewhat ambiguous market. Additionally, as utilities change the way they operate, your company should consider an energy consultant who can help mitigate new risks, as well as predict and prepare for future risk in the energy market.
Electricity pricing risks can take the form of:
- the contract terms and conditions of your energy purchase agreement
- your facility’s energy consumption load profile
- why and when your facility peaks, plus controlling these peaks when the grid is likely to peak to manage capacity and transmission obligations (where applicable)
- how both consumption and demand drive your electricity supply rate, and
- how future leasing/occupancy/production profiles, along with any planned energy conservation measures, may change your volume and demand profiles so you can optimize your procurement and risk management strategy
The process of understanding and managing all of these risks is complex, but it is necessary in order to make strategic energy purchases. Your electricity procurement strategy needs to align with overall facility operations, and your energy rate consultant should understand how to structure contracts for demand-supply optimization.
EnergyWatch’s utility data management and reporting platform, watchwire, helps you manage uncertainty about pricing. Shifting policies and regulations often causes changes (i.e. increases) to a company’s utility bills that need to be understood and properly budgeted. Watchwire tracks all billing line items so you can analyze year-over-year variances in pricing components such as capacity, create accurate energy budgets, and ultimately track budget variances. To discover more ways EnergyWatch can help you manage energy pricing risk in 2021, watch our webinar, Managing Supply Rates for 2021 Budgets.