For those following the news, one thing has become evident. The cost of everything is higher. Energy is no exception. As a matter of fact, the higher costs of energy are a prime driver in the rise of inflation during the last year. For manufacturers and other businesses, this is hurting the bottom line.
There are a multitude of reasons for the higher cost of energy, but let's focus on the most impactful . . .
Supply and Demand
The Cost of Natural Gas – Not only is natural gas used in large volumes by most manufacturers, but Natural Gas is also the source of 38-40% of electricity production. The cost of Natural Gas sank as low as $1.42 per MMbtu during the height of the pandemic in 2020, the same time that the oil market cratered into negative territory, and, due to lack of demand, Natural Gas drillers shut down production. Now that the economy has opened back up again, demand is higher than pre-pandemic levels, but production of Natural Gas has failed to keep up with that demand. As a result, what had been priced at $1.42 per MMbtu in July of 2020 has risen to above $8.00 per MMbtu in July of 2022 on the Henry Hub NYMEX.
Increased Exports – Over the last 18 months, the United States has become the leading exporter of Liquid Natural Gas (LNG) in the world, surpassing Qatar and Australia. Where the U.S. formerly exported 3-4 Bcf/d, we now export approximately 20 Bcf/d. ~13 Bcf is transported via ship out of LNG facilities like Sabine Pass and Corpus Christi, and another ~7 Bcf is exported via pipeline to Mexico from the Permian Basin in West Texas and New Mexico. In the past, we were producing90-91 Bcf/d thanks to shale drilling and the associated natural gas that is a byproduct of drilling for oil. We now produce ~94-95 Bcf/d, but that is not enough to keep up with the increased demand for larger exports.
Geopolitical – The Russian invasion of Ukraine threw a wrench in worldwide oil and natural gas supplies. More than 40% of Europe's Natural Gas needs are supplied by Russia. While, as of this writing, Europe has not yet sanctioned Russian Natural Gas or Oil, they have sanctioned Russian coal, forcing European manufacturers to switch to Natural Gas if they had previously been using coal. So far, the effect of the Russian invasion of Ukraine has been on fears of supply interruptions, not actual shortages, but the fear is real and has sent the European market skyrocketing. At the end of March, 2022 the price was $42.29 per MMbtu, dwarfing what we pay in the U.S.
Weather – A cooler than normal spring and what is expected to be a scorching hot summer have strained demand. Colder weather in the winter and spring means heaters are used longer and more often, hotter summers mean higher use of air conditioners which greatly affects electricity usage. These extreme weather conditions increase demand and, coupled with record exports, means that we have less natural gas in storage than we normally do.
What You Can Do
For Manufacturing Works members currently facing the renewal of electricity or Natural Gas agreements, when the market is in the worst position it has been since 2008, there are steps you can take:
Reduce Your Usage – As the saying goes, the cheapest kWh is the one you don't use. Look at ways you can reduce your electricity and natural gas usage. Upgrade your lighting to LED which will cut the amount of electricity you use to power your lights by 55-70%. Plus, it lasts longer and stays brighter, longer. If you have a large enough facility, explore renewables such as solar. The cost per unit of solar continues to drop and there are often federal tax credits available for making the switch.
Change Your Buying Strategy – In the past, finding the cheapest rate and signing up for three, four, or five years was the norm in Ohio. And, when the rates were bouncing along the bottom of historic lows, this strategy made some sense! But now? Why would you lock in for multiple years at a point where the market is nearing record highs? All that will mean is that you will continue to pay near-record rates, even when the market starts to decline. Another solution may be to block and index your energy purchases. Hedging a portion of your energy and purchasing blocks of energy in the future when the market conditions are right. This is a more involved process, but a qualified energy consultant can guide you through the process and can actually make this rather easy on your end. Today's markets prove the old adage, "What goes up must come down". The advantage of this strategy is that you can ride the market back down to normal levels and even lock up all of your energy when market conditions are more favorable. For Natural Gas, an alternate strategy may be doing what is called a "NYMEX Plus". Natural Gas can be purchased the same way by using a NYMEX PLUS strategy. You would pay the monthly settlement price on the NYMEX plus an adder to cover supplier costs and as the rate goes back down to Earth, your rate goes down with it. Like electricity, if the rate goes low enough, you can lock up the rest of your natural gas at that price for the remainder of the contract. Make sure you talk to an energy professional about these strategies so that they can match you up with the right supplier.
Chuck Valenches is the Key Account Manager for TPI Efficiency, the preferred Energy and LED Consultant for Manufacturing Works. Chuck has been a member of Manufacturing Works for the last six years and continues to help members with their energy strategy and efficiency projects.