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Rising Energy Prices Hit Your Bottom Line

July 11, 2022
Supply shortages are roiling electricity and natural gas markets, meaning industrial consumers like foundries must stay focused on their power needs and contractual requirements – or opportunities.

Electric and natural-gas wholesale costs are jumping – and utility supply costs are catching up fast. Rising natural-gas costs are a key component of increasing costs of electricity since much of our power is now produced by gas-fired generators.

Electricity. In the PJM Interconnection market, home to many foundries, electricity prices jumped 51%, to $80.28/MWh in the first quarter of 2022. This was up from $53.30/MWh in the same period a year ago, reports the grid operator’s market monitor in a report released May 12, 2022. For example, recently customers of ComEd in Illinois have seen a rate increase of 40% – and another adjustment is coming in October this year.A similar situation is occurring across much of the country. A foundry in Minnesota was notified by its local utility to expect an 18% rate increase.

Due to rising natural-gas costs, inflation, etc., electric utilities across the country are scrambling to increase rates to cover their own costs. Many are catching up to available retail rates in deregulated states. Expect to see higher electric bills soon.

Shopping for power. Electric futures pricing has been extremely volatile, forcing some retail electric supply companies to periodically suspend trading.  The best price quotes we’ve been able to secure for a mid-size client in the Midwest have risen almost 60% in the past three months. The client was hoping the rates being quoted would go down, but instead they kept rising. Now this amounts to over $300,000 of extra energy costs over the next five years. 

Even if you accept and sign an offer from a supplier, the supplier will immediately reevaluate the profitability of the offer, based on real-time market dynamics. If the quote is no longer profitable to the supplier, it will withdraw the offer. You can request a new quote, but the same rules apply. Because market prices can change very rapidly, you should accept an offer as soon as possible… Like within an hour.

Check the fine print. If you can shop for the electric supply to run the foundry, you may want to review the details of any potential supply agreement.  Huge changes have been happening in the retail electric market.  Prices have risen steadily since the start of 2022, so be prepared for sticker shock.  Also, there may be some contract terms that recently have become more stringent. 

One contract term that has appeared in some supplier offers states that if the client closes its business, then the client would be responsible for the cost of power that the client was expected to use in the balance of the agreement. When we insisted for that language to be changed, several suppliers refused. For many manufacturing companies that could run into the tens or hundreds of thousands of dollars. Thankfully, a different supplier agreed to replace it with an allowance for a 30-day notification to the supplier – at which time the contract would be terminated.

For years, supply contracts have had provisions that allow the supplier to cancel the contract if market conditions make continued operations unprofitable. This clause was rarely invoked because market conditions were relatively stable. 

But recently, we’ve had one supplier invoke that clause – specifically due to unprofitable market conditions. The supplier initiated paperwork to return the foundry to the local utility for its electric supply (and there was only two months remaining on the contract!).  This is further indication of the increased cost and volatility of the wholesale electric market.  We provided the foundry quotes from alternative suppliers who could provide lower long-term, fixed rates than the utility would charge.

The best electric rate. Of course, the cheapest form of energy is that which you don’t use. Find ways to conserve and eliminate energy consumption. Create accountability for how much is consumed. Initiate programs to incentivize and reward employees who find creative ways to reduce your costs. Monitor consumption to ensure savings continue. You might be pleasantly surprised at how much you save.

Beyond that, I continue to sing the virtues of installing some electric generation capacity right on your own property. It can save a lot of money and reduce a foundry’s risk from an increasingly fragile grid.

The impact of rising costs can be profound – even final, as one primary aluminum manufacturer has concluded. Remember too that the situation reshaping energy costs have a global dimension: Australian metalcasting company Intercast and Forge has shut down operations in their ferrous foundry because of unpredictable and very high electric rates. It’s a precautionary tale that will resonate with foundries closer to home.

Brian Reinke, president of TDI Consulting, is an energy-cost saving consultant. Contact him at [email protected] on a customized, no-obligation quote for your own on-site electric system.