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Forecast Calls for Less Stability, Higher Energy Prices

Dec. 3, 2021
Winter weather impacts energy supplies, and metalcasters may find utilities will pass along their own rising costs.

Recently the U.S. Energy Information Agency released its Winter Fuels Outlook, October 2021, forecasting higher natural gas and electricity prices for the coming winter. How much higher will depend largely on the weather. Natural-gas supply prices already have doubled for most of the country. We’ll leave the forecasting to the EIA and focus on some potentially unexpected impacts you may see from higher energy prices.

Higher natural-gas costs will increase both your gas and electric bills. Many, if not most, electric utilities are allowed to pass increased fuel costs directly to their customers. Almost half of our electric generation is now natural-gas driven.

Extreme weather events, such as a “polar vortex,” are often the reason for severe outages. Increased demand for natural gas and electricity, coupled with decreased supplies from distribution systems, conspire to put great stress on gas and electric delivery. Frozen gas-distribution systems compound the problem if generating plants do not receive enough gas to operate.

Breaking things down

When shortages become severe, utilities and state regulatory bodies have few options to try to regain stability in energy delivery. While other options may exist, in multiple emergency situations I have noted several standard responses from the utilities: 1.) Conservation; 2.) Financial mitigation (i.e., higher energy cost); and 3.) Decrease availability. What are the potential effects on foundries from these measures?

1. Conservation. Many utilities now have formal programs to incentivize businesses that are willing to reduce energy consumption when requested. Financial incentives can be significant if you are able and willing to participate. Pre-registering and qualification in these programs is required. A further benefit is the potential goodwill and public relations that could result.

Foundries should consider enrolling in such incentive programs. Aside from the financial reward for participating, they also may benefit from the early warning of stress on the system.

2. Financial mitigation. Consumers may be reluctant to conserve energy, especially during extremely cold conditions. If those efforts are not enough, the authorities can resort to good old supply and demand economics: Increase the cost and demand will be reduced.

The problem is how quickly the utilities implement the costs and the amount that they increase them. During the 2020 polar vortex, ERCOT (Electric Reliability Council of Texas) lost almost half of its electricity generation assets and had to rapidly increase wholesale electric rates to the maximum of $9,000 per MWh. Many electric customers were completely unaware that their rates had suddenly skyrocketed.

If your electricity or gas supply is tied to market rates, such as an index price, you could be exposed to extremely high prices before you know it’s happened.

3. Decreased availability. For the utility, increasing the cost of electricity may not be sufficient during extreme events. ERCOT came dangerously close to a complete system collapse and had to resort to rolling blackouts. Such blackouts may come suddenly and have an unknown duration.

Every foundry should review its emergency power and shutdown procedures to minimize this possibility.

Contact your local utilities to learn about their customer notification procedures for service outages and restoration. How much warning will they provide?

Moving forward

Energy, especially natural gas and oil, are global commodities. Many factors affect their price, but it now appears that rising energy prices are the new normal. As electric bills continue to rise, some foundries are finding relief by installing on-site power generation equipment to use on a regular basis.

Market prices for both natural gas and electricity can be extremely volatile. The ERCOT experience last year is well known, but many other similar examples exist. Radical price swings occur almost every year in the Northeast when especially strong Nor’easter’s arrive.

In some areas of the country you can shop for electric and/or natural gas supplies. This is an excellent way to lock in rates for one or more years and protect you from unexpected and rapid cost increases. We have helped a number of foundries enter into favorable rate agreements. Perhaps even more important, we’ve helped them avoid potentially negative factors that sometimes show up in the fine print.

We have long benefitted from relatively stable and inexpensive energy systems. It appears we are in a paradigm shift to less stability and higher prices.

Brian Reinke, president of TDI Consulting, is an energy-cost saving consultant. Contact him at [email protected].