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All About Energy

Major Impacts on the Cost of Energy

Jared Crane Jun 27, 2017 10:10:00 AM

There are many factors that impact the cost of energy but perhaps the greatest is simply the power of supply and demand. Even Issues like energy deregulation, political unrest, and voter initiatives take a backseat to the power of supply and demand. That is because of "time", which is not a single quantitative force here, plays a very large role in the available energy supply and the demand for energy.

Time Has a 3D Effect on the Cost of Energy

Time is the demand and availability of energy right now, today, tomorrow, and into the future. So, when we talk about time, it is important to identify which time we mean because, in terms of energy costs, time is all of those times and at the same time too — past, present, and future.

Time and energy pricing are two reasons why many companies turn to the help of a professional energy broker. A broker understands timing, energy production, seasonal differences and all of the normal" considerations that impact the price of energy. They also understand those factors that are so complex that most people without industry experience cannot comprehend how they work. That is the power of forging an alliance with a quality broker.

Timing: Why and How Timing Impacts Energy Pricing

Timing is a complex term. It not only refers to today, this week or this year, but the time of day, the current season, the time left on your current contract and also to the future energy needs of the grid and of your company. Timing is really a question of when and what rather than right now. As such, time becomes a highly complex part of the energy pricing and acquisition. It makes the art of asking questions critical.

How to Design Your Comprehensive Energy Services Program

Step 1: Start with gathering data about prices — You want to look at past prices across different times of the day, year, etc. Your goal is to understand how energy costs change throughout the day - peak hours and off-peak hours - and throughout the week. Some days energy costs less than it does on other days. Also, you want to look at how the cost of energy changes throughout the year. Summer and winter tend to be the most expensive times of the year to buy energy.

Step 2: Look at the available options — Wind, solar, hydro, nuclear, etc. The price of each energy source changes throughout the impact of time, - past, present, and future. Look into how much of each type of energy is available and when it becomes rare. Sometimes you can buy energy way into the future and get great prices, but as the year wanes, the price goes up because there is less of that type of energy generation available.

Step 3: Apply time to what you find for both pricing and availability. How far out should you be getting prices? The general rule of thumb is that the further out you start, the more opportunity to execute at a lower price. Things to avoid when looking timing for energy procurement:

  • Never wait for the last month of your energy contract to shop for a new contract. There are fewer options available and the prices can be much higher. Goal: Shop 6-months to 24-months out for new energy opportunities.
  • Never be a price taker. Shop for the immediate needs to set your company up for long-term savings. For example, if your contract is ending soon and it’s going into winter, get a 6-month term to get past winter until rates go lower in months like March and April then lock in a low rate to renew for the next year or longer.

Things to Do When Looking for Energy

The active approach to finding and procuring energy at affordable rates include:

  • Looking as far in advance as possible, which varies depending on the market. Do look ahead as far as the futures market is trading to investigate pricing. The idea is to compare every term or period for the data and components that then become a solid energy procurement strategy. In fact, be prepared to strategize as efficient and affordable energy requires constant strategizing. That process may require that you look up to 5 years out so that you can see how your current rates stack up to the potential of new energy sources.
  • Energy futures are complicated and the market does not move in a single direction, it fluctuates in 3D. That type of movement occurs because of many inputs and as each input changes the big picture changes too. A lot of the components are simply too complicated to track without the vast experience of working intimately within energy procurement. This is why companies consider the benefits of a commercial energy procurement specialist. An example of the complexity of the energy procurement are the rates — fixed, index, block and index, heat rate and hybrid products and how they relate to timing, market conditions, and your business. All effect the cost and purchase options for energy. All are available in the short-term and long-term.

Timing impacts price in a variety of ways and across many channels. We mentioned politics, but there are issues such as natural disasters, weather, deregulation, regulation, and even the type of energy available and when that energy is available.

  • Weather - it is not only daily, but it trends weekly, seasonally, and annually. Rain, wind, hurricanes, tornados, cyclones, typhoons, etc are all types of weather that disrupt many industries, including energy production.
  • Renewable energy — Many countries have initiatives to use more renewable energy. The role, here in the U.S. is growing as renewable energy is starting to play a bigger role in the lives of the average consumer.
  • Traditionally people looking to transact on energy contracts in the shoulder months. March/April and October/November see a decrease in energy consumption so the time of year helps drop the price of energy. For example, look at the energy usage in Texas during the summer when many businesses and homes crank up the AC. In the winter, homes use more heat to offset the cold weather. Weather plays a huge role in the price of energy.

However, it is not just the time of year, but the time of day. There is peak energy consumption every single day. Other factors include:

  • Market events – 4CP (ERCOT) - Four Coincident Peaks, and 5CP (PJM) - Five Coincident Peaks. This is the system that measures the peak energy usage during the day and for the last several years its' focus has been during the times of 3:45 pm and 5 pm. In summer 4CP and 5CP impact the delivery of power and its price.
  • The impact of temperature on energy transportation and delivery – the hotter and dryer it is, the less energy power plants can produce. For example, in a drought it is hot, the energy generators (at power plants) are under more demand to produce more power. However, because of the high demand and the elevated temperatures the power plants cannot produce as much energy because they cannot keep the plant at an ideal temperature for energy production. Drought affects the amount of available water, which is part of the process used to cool power plants.
  • Switching from coal and gas and adding in renewables – wind and solar added to the generation mix. The number of choices for energy production has grown. It used to be just electricity produced from hydro or fossil fuels. Today, renewables such as solar and wind started to become a larger part of the generation mix. Such options allow power plants to combine intake methods such as using solar during the day and wind at night. In West Texas, for example, such options impact the price of power.

Major things that impact price are:

  • The start month of contract
  • Contract term length
  • Availability of generation (how much electricity is available)
  • Weather
  • Natural gas prices
  • Congestion of energy users — Your location impacts the price – if you are in the middle of nowhere it is more expensive because energy is lost during transport and delivery of energy. The process of “losses” means that energy consumers cannot receive 100% of energy generated. Loss can reach 3% or more depending on how far from the plants the energy must travel. For example, in the Texas-New-Mexico Power (TNMP) are, it is a lot more expensive to operate there because facilities are so far from where the energy is created and distributed from.
  • Transmission cost - The market covers energy loss through a bucket program. Consumers pay for unaccounted energy – energy that is stolen or lost.
  • Percentage of renewables in the market impact the price; how much of the energy used that has to be green. Regulation and deregulation play a part in how renewable energies MUST be used whereas consumer preference opts for renewable. Such programs and regulations cost more. If your company goal is to be 100 percent green – it’ll cost more to meet that goal.
  • Capacity markets and prices (cap and transmission) which directly affect supply and demand. Capped markets drive up the price of energy. Free markets drive down the price of energy. Regulations help to keep energy prices stable, but deregulation causes the number of variables that impact energy's price to rise.
  • Changes in law (regulatory changes) - ex: greenhouse gas emission target – trying to get away from fossil fuels.
  • Supplier margin is 3% to 5% of the overall price - While this is a focus, there is not much savings in reducing the margins.
  • The amount of energy used per company. If your company needs more energy at unexpected times, it drives up the cost of the energy.
    • Industrial and large commercial pay less per kWh
    • Big Picture View: Electricity Data Browser
  • When you use power such at peak hours it will drive up your prices. If possible, scheduling major energy consumption activities during off-peak hours helps you save money.
  • Tax-exempt Status —if your business is a manufacturer, school or church, for example you often do not have to pay sales tax.
  • Contract terms — Contract terms are a variable that is controlled through the language within the contract. You never negotiate a contract near the end of your current contract. You need all of the options available which means that you look for energy as far out as 6-24 months from now.
  • Depending on your creditworthiness the supplier may require that you pay a deposit. When you must use a deposit, then it costs you more money because you not only loose the use of that money and its potential interest but you also typically have to pay a higher price for the energy. Having more supplier available can help this because they all evaluate credit differently.

Many factors impact the cost of energy. The real question for energy consumers is how can you control them. For most, the only answer is a commercial energy broker.

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Topics: Electricity Rates, Energy Cost