- Category:
Small Business Energy Savings - Published:
March 25, 2022 - Updated:
January 19, 2024
What Factors Influence Your Small Business’s Energy Costs?
Energy prices are a major cost of doing business. Controlling these costs can affect your bottom line. You can’t manage the weather or the world energy market, but you can control many factors that influence small business energy prices. It also helps to know what affects electricity prices and how your business can cut down on energy use.
8 factors that affect your business’s electricity price
Energy prices fluctuate based on many factors, which can be a challenge when trying to understand your energy costs. We’ve gathered this list of what influences the price of energy so that you can track them and stay on top of shifts in the energy market. Understanding these factors affecting the cost of power generation will help you limit your expenses — especially for businesses that are considering variable-rate plans.
1. The type of fuel your small business uses
You have options when it comes to energy sources for your business. In many parts of the country you have a choice of fuel types:
- Electricity
- Natural gas
- Petroleum
- Renewable resources
How the market affects energy prices and the cost of each type of fuel varies based on changes in demand and availability. The cheaper and more readily available your fuel source, the lower your overall energy costs will be.
2. The type of energy plan your small business has
Your energy contract is one of the factors that influence energy prices for your business. In addition to choosing your type of fuel, you can also choose your type of energy plan. Both are important inputs to your energy procurement strategy that you should think through in order to take advantage of energy deregulation. You may be able to save money choosing variable vs. fixed-rate plans and shopping around with different energy suppliers.
What to consider when choosing an energy contract for your business
Things to consider when choosing an energy contract for your small business include things like the supplier’s reputation and the rate structures and lengths of plans they offer. Consider your risk tolerance. Do you think rates will go up or down? Locking in a price based on your assumptions has some risk.
Additionally, your energy usage patterns may create savings opportunities. If you can shift high energy use operations to times when rates are low, you can save a significant amount. As you evaluate different types of contracts, also take a look at “How to Choose an Energy Supplier When Switching.”
3. How close your business is to its energy supply
One of the factors affecting electricity prices and a major component of your electricity cost is the transmission fee, which covers the cost of bringing electricity to your place of business. If your business is close to a power generation plant, you may pay less in transmission fees than those located farther away.
4. The season or time of year
What influences the price of energy can be the time of year. Demand rises and falls depending on the season, affecting energy prices.
Understanding energy market cycles
Energy markets are cyclical. You can track prices over time and predict upcoming changes. The seasonal energy cycle is driven by temperature changes. In some areas, extremely cold winters increase demand. In others, high heat drives increased air conditioner power draw. The demand for energy peaks during these times and up go prices. You can cut your costs if you secure your price during spring or fall, when electricity rates are lowest.
5. The current economic climate
The state of the economy is another one of the factors that influence energy prices. When the economy is booming, the demand for goods and services goes up. Businesses increase production and distribution to meet this increased demand, and that increases their demand for energy causing higher energy prices. Knowing how the market affects energy prices can help you better anticipate and prepare for changes in energy costs for your business.
6. Extreme weather and natural disasters
Another factor in terms of what affects electricity prices are extreme weather and catastrophic natural events. Inclement weather or natural disasters can disrupt power generation and transmission. A series of hurricanes reduced natural gas production in the Gulf of Mexico in 2017. Ice storms in Texas led to widespread power outages in 2021. With less energy in production and with disruptions in the distribution network, market prices went up during these events.
7. Government action
Government entities affect the price of energy through tax and regulatory policies. The U.S. Department of Energy has created the Strategic Petroleum Reserve to secure energy supplies and lower price volatility in case of emergency disruptions. Some states are temporarily cutting energy taxes to ease the pain in today’s market.
A growing number of states have given residential and business consumers energy choice through deregulation. When customers can choose among energy providers, those providers have to compete on service, innovation and price. The result is you have more flexibility, more choice, and lower costs.
Do all states offer energy choice to businesses?
Not all states offer energy choice to their residents. Some 17 states have adopted energy deregulation policies, including Texas and many Mid-Atlantic states. The history of energy market regulation and deregulation is a fascinating one.
8. The global energy market
Changes in the global energy market have the potential to affect how energy is priced in America. By the end of 2020, the US was energy independent and exported energy. That rapidly changed with new government policies. We are now back to being a net importer of crude oil, meaning we import more than we export.
As we have recently seen, disruptions in supply have sent crude oil prices skyrocketing. The less crude oil imported or produced domestically, the higher the market price.
What you can do to limit your monthly energy costs
Factors that influence small business energy prices, from weather to government policies and geopolitics are beyond your control. Understanding what influences the price of energy that you can control, however, will benefit your bottom line.
Given the dynamics in today’s power markets, now is a good time to evaluate your small business energy options and consider the value of potentially switching energy suppliers. Even staying with your current provider, you may want to investigate other plans and service packages that could work better for you.
You may not control all the factors affecting the price of energy, but you can study your small business energy consumption patterns and use some business energy savings tips to control your energy usage and costs.
