- Category:
Small Business Energy Savings - Published:
June 21, 2022
Why Are Energy Prices Increasing?
Commodity prices are rising across the economy. Energy is one commodity where rising prices are quickly obvious to the average consumer and small business. When seeking an answer to why are energy prices increasing, it helps to understand the factors that influence the price you pay for electricity and gas.
What’s causing energy rates to go up?
You are not imagining things if you are wondering: Are energy rates going up? Competitive energy markets normally constrain prices. Yet, we are experiencing a large number of factors that impact how the market affects energy pricing.
Energy price volatility is the term used to describe how quickly and drastically energy prices can fluctuate, and it’s greater than it has been in the recent past. Global geopolitical events influence the volatility of energy prices, and when those events or conditions compound they create the potential for high overall price levels. Here are some of the reasons why you might have seen an electric bill increase in 2022.
1. Increasing natural gas and coal prices
Natural gas power generation plants have become a preferred source of electricity because natural gas burns cleaner than other fossil units and newer, more efficient gas units tend to be less expensive to operate. Yet, as the economy returns to pre-pandemic levels and world events impact the natural gas market, demand for natural gas is beginning to outpace supply and drive price increases.
Traditional natural gas wells and fracking are producing at near record levels, yet demand is rising faster. The average price paid by power generators for natural gas is up 124%, averaging $8.81/MMBtu this summer. The resulting increases are passed on to electricity customers.
Additionally, the plants that use coal to generate electricity have had to pay more for the coal they burn. The average cost of coal in February of 2022 was $2.18/MMBtu, up 13% over a year ago. It is a case, again, of lower supply and higher costs contributing to why energy prices are increasing for consumers.
2. Climate Change
Scientists expect increases in global temperatures to continue and hotter summers are on tap for the US, according to the National Weather Service’s Climate Prediction Center. Hotter summers will lead to more AC use and increasing demand for energy and thus increase energy prices.
Climate-change-driven weather events, such as the major winter storm in Texas in 2021, can affect power supply as well. The extreme temperatures these events bring increases demand for electricity beyond production capacity. Wind and ice can also disrupt production and distribution. This can lower the supply of electricity when demand is high, resulting in upward pressure on energy prices.
3. Geopolitical conditions
Energy markets are increasingly global, and political instability around the world affects local energy prices. Recent events like the Russian invasion of Ukraine disrupt the free flow of abundant energy and other commodities. The result is an increase in the price of everything from natural gas to heating oil to coal. Did electric rates go up in 2022? Yes–and that is a trend likely to continue.
4. Supply chain issues
Issues with the supply chain are affecting every aspect of the economy, including the energy sector. The shipping of any kind of fuel is now slower and more expensive. Obtaining replacement parts for maintenance and upgrades is affected by availability and shipping delays. Routine grid maintenance and upgrades are more expensive than usual. Energy price volatility and supply issues are part of why energy prices are increasing. The increases in these costs factor into the price you pay.
How much are energy prices expected to rise in 2022?
With so much pressure on so many different factors, it is easy to see why electricity prices have increased. The government is predicting electricity prices will continue to rise in 2022 at a rate of 3.9% to 14.26 cents/kWh. The predicted increases vary by region. Competitive markets that have been deregulated are likely to have more stable prices, yet every market is going to be affected. Unless things change dramatically, the price volatility and potential for increases will continue in 2023.
Understanding energy price volatility
With so much uncertainty across so many of the factors that influence energy prices, you may see your electricity rates swing up and down during this period of volatility. You can learn more about what factors influence your small business’s energy costs and also get the specifics as to how your small business’s energy pricing is determined.
How energy market volatility affects small businesses
Energy market volatility can affect your small business in several ways.
- Leads to unpredictable costs and expenses. When you don’t know your costs and expenses and cannot plan for them, your profitability is at risk. Still, you can get a bit of a handle on them when you know how to estimate utility costs for a small business. You may not be accurate to the penny, but you’ll be better off than operating completely blind.
- Makes it difficult to forecast budgets. Forecasting your budget is much harder when prices are volatile. You may want to add a cushion for the ups and hope for the downs when it comes to energy prices.
- Planning operations is challenging. If you operate a power-hungry business, you may need to change production and operation schedules for times of the day when energy demand is lower.
- Influences customer spending patterns. High energy prices can hit your customers in the wallet. Consumers and business customers may not be able to spend as much as they normally would with your business.
How to help lower your energy costs
While lowering your business’s energy costs has always been a way to increase the efficiency and profitability of your business, in today’s volatile market, it is even more important. You will protect your margins and give your business a bit of a cushion against unexpected cost increases if you can lower your small business energy consumption and find ways to lower your small business utility bills overall.
- Lock in your energy rate. One of the easiest ways to fight volatility is to lock in your electric rate and lock in your natural gas rates. Find out if your utility offers fixed vs variable-rate energy plans.
- Switch your energy plan or provider. What is energy choice? If your business is located in a deregulated market, learn how to shop for an energy plan and how to choose an energy supplier. You may save money by finding the supplier with a plan that best fits your business.
- Purchase energy-efficient appliances and equipment. If you have been thinking of upgrading, now is a good time to invest in energy-efficient office equipment. You may find that the savings from using less electricity will quickly cover the purchase price.
- Share energy-saving practices with employees. Being mindful of your business’s energy use habits can help curb waste. If you can get employees engaged in energy-saving practices, you can capture savings that add up over time, no matter what happens in the power markets.
Instead of just wondering why energy prices are increasing, take steps to cut usage and find the most cost-effective options. Explore and compare small business energy options in your market to take control despite energy price volatility.
