Winter is coming. For hoteliers knee-deep in budget season, it’s important to know what’s in store relevant to energy costs in the coming months and year. Right now, the natural gas spot (variable index) rates are trading just under $3 per one million British thermal units. For the remainder of 2018, natural gas rates are forecast to be flat to slightly up compared to 2017. Pricing this year has been greatly impacted by weather events and this trend is expected to continue. As we move into the winter months, prices are again expected to become more volatile. During the last few winters, prices have taken sharp upward turns when temperatures are outside of expectations.
For electricity, 2018 has seen large price swings by market. Electricity prices vary by market in the United States, Canada and Mexico based on how power is generated. Some electricity markets have seen large price increases; most notably, Texas; Alberta, Canada; and many markets in Mexico. In Texas, a decrease in power generation increased prices 30 percent this year, and that trend is expected to continue. Those in New York, Illinois and the Mid-Atlantic have seen price decreases and added price relief of some of the tariff-based charges. For the remainder of 2018, markets that have experienced near historic low prices, such as New York, are likely to see an upward trend in prices.
What’s in Store
The story for 2019 for electricity and natural gas prices revolves around natural gas production and storage. We ended the winter of 2017-2018 with the second lowest amount of gas in storage in the past decade, which creates upward pressure on prices. However, after a 1 percent growth in natural gas production from 2016 to 2017, forecasts call for a 10 percent growth from 2017 to 2018. Exports are taking roughly half of the growth in production, but are growing at a moderate pace compared to projections from 2017.
If this winter is mild or normal, there should be plenty of natural gas in storage. This will drive prices down, but the market isn’t sure if production and storage will both become favorable for buyers in 2019 or later. As a result, natural gas futures are “backwardated,” meaning the further into the future you go out, the lower the rates (e.g., prices for calendar year 2020 are lower than prices for calendar year 2019, and so on). The futures rates in 2020, 2021 and 2022 are at historically low prices. What’s unusual is that many further-out futures contracts are often at lower prices than current month’s settlement prices.
For example, the June 2018 gas rates closed at $2.88/MMBtu, but June 2019 futures rates are trading 8 percent lower. This creates an opportunity for energy buyers who are willing and able to look out to 2019 and beyond now. However, if the temperatures during the winter of 2018-2019 are below expectations, this could cause gas storage to dip. If the storage reaches the 1,000 billion cubic feet mark, we will see extreme volatility.
How to Budget Energy in 2019
If you have variable rates going into the winter of 2018-2019, then you will be at risk for higher costs. The past two winters (2016–2017 and 2017–2018) had the highest rates of the year in either January or February by a wide margin. Couple the potential for higher rates with higher consumption and it can be hard to account for in a budget. Electricity prices can also become more volatile during the winter months.
For natural gas and electricity, the simplest way to avoid budget risk for 2019 is to ensure that hotels have enough price protection set for early 2019 as soon as possible. For more risk-averse buyers, longer-term (three to five years) natural gas and electricity contracts will yield historically low costs in most markets.
Studies have shown that managing energy contracts based on market conditions results in lower costs and lower price volatility than managing contracts when they near expiration. The simplest way to mitigate cost increases is to layer in contracts regardless of your contract cycle. Energy buyers also can seek ways to reduce their consumption through new building automation technologies, capital investments and utility efficiency incentive programs.
Chip McIntyre is SVP, strategic sourcing for hospitality procurement services provider Avendra.
Kevin Ritter is an advisor at Zenith Energy, a company that focuses on the procurement and management of energy supply.