Pressures on the energy market have been mounting and soon consumers will be faced with the fallout.
The combination of the pandemic causing workplaces to go dark thus lessoning demand and production, followed by labor and supply shortages, a diminished natural gas supply caused by the invasion of Ukraine, and now inflation, have pushed energy markets to the brink.
Couple that with the rising value of exported liquified natural gas overseas, which is driving producers to move more of their supply to Europe where the commodity commands pricing nearly five times higher than it does in the United States, and you have a recipe for skyrocketing electricity rates.
“Businesses can expect electricity prices to climb by nearly 40% this June,” explained Rob Myers, managing partner at Ohio Industrial Energy.
“Roughly 80% of electricity is now generated from natural gas instead of coal, making those markets more correlated than they’ve ever been,” he said.
Pricing is based on the wholesale electric market and determined by the utilities during auctions conducted in November and March for the following June.
“If the market is volatile during those times, as it was this past November, it can have big consequences. Current rates in Columbus are sitting at roughly 7.2 cents per kilowatt-hour, and the November auction cleared rates at 12 cents per kilowatt-hour,” he explained.
“A record number of overseas liquified natural gas contracts were put into place in 2022,” said Myers, “and those are 20-year contracts so that pressure isn’t going away,” he added.
Tenants, property managers, and building owners all will be impacted. Tenants in gross leases are likely to see their operating expenses increase. For building owners and property managers, their properties could become less competitive because of the need to charge higher lease rates.
“Older, less efficient buildings will become less desirable to tenants who are currently in the market,” said Matt Osowski, an industrial specialist at NAI Ohio Equities.
“Users who consume a large amount of power, such as manufacturers, will feel the greatest impact,” he added.
As one of 13 deregulated states, Ohio has a market for competition. Businesses can work with a third party to negotiate electric rates through a pool of suppliers and lock in their rate.
“Businesses that start getting proactive now and looking at pricing, can sign up for June 2023 to start with an electric supplier that will keep rates about the same or better than they are now,” said Myers.
“We work with about 12-15 suppliers that we consider to be best-of-breed, and we leverage those suppliers to get the best pricing for the client and put the best strategy in place,” he continued.
“Consumers need to be aware that pricing isn’t the only consideration. There can be a lot of ‘gotchas’ such as penalties for variation in annual usage,” he warned.
Myers says pairing energy audits to make buildings more efficient with contract negotiation efforts could also be of value.
“If that audit turns up some things from a capital improvement standpoint, and you negotiate a contract with an energy supplier, in some cases, they will provide on-bill financing for those capital improvements,” he explained.