Your Energy Price is No Longer just about Energy
Commercial energy prices are now driven by complex factors beyond market commodity rates, including infrastructure needs and surging demand. Businesses should shift from simple purchasing strategies to proactive energy management to better understand, budget for, and mitigate rising costs.
For years, most commercial energy conversations started with a pretty simple question:
What is the market doing?
Natural gas up? Electricity down? Should we lock in now or wait?
Those questions still matter. But today, they are only part of the conversation.
The price businesses ultimately pay for electricity is being influenced by much more than the commodity itself. Capacity costs have increased significantly. Transmission systems require continued investment. Peak demand matters. Aging infrastructure needs to be replaced. And enormous amounts of new electricity demand, particularly from data centers and other large loads, are trying to connect to a grid that was never designed for this pace of growth.
That creates an interesting situation for commercial energy users.
Natural gas prices can be relatively inexpensive while the total cost of electricity continues to increase.
We are seeing that play out across PJM.
The most recent capacity auction cleared at the $325/MW-day price cap, while PJM continues working through the challenge of adding generation quickly enough to keep pace with growing demand.
Meanwhile, hundreds of new generation projects are entering PJM's reformed interconnection process. That is encouraging, but proposed generation does not solve today's problem. Getting a project studied, approved, financed, built and connected takes time.
So what should businesses do?
I think we need to change the way we talk about energy.
The goal cannot simply be finding the lowest electricity or natural gas price. Instead, we need to understand what is actually driving the total energy cost of the facility.
Some costs can be managed through purchasing strategy. Others can be influenced by when and how a building or facility uses electricity. Peak demand can matter. Capacity exposure can matter. Contract structure can matter. Operational decisions can matter.
And some costs simply need to be identified early enough that they can be budgeted and planned for.
This is why I believe the energy conversation is becoming less about purchasing and much more about management.
Understand your risk.
Analyze the market.
Develop a plan and process.
Execute when the time is right.
The companies that do this well will not necessarily be able to say they purchased at the absolute bottom of the market every year.
But they may accomplish something far more important.
They will understand their exposure, know why their costs are changing and have a strategy in place before the market forces them to react.
In today's energy market, fewer surprises might be one of the best measurements of a successful strategy.