Paul Leanza Shares Market Insights for the Manufacturing Industry

The following article recently published in Manufacturing.net, which delivers up-to-date information on what's shaping the manufacturing landscape to a global audience. You can access the original article on Manufacturing.net here.

For more insights from IGS Energy, visit our Energy Resource Center.

As Prices Fluctuate, Here's What Manufacturers Need to Know About the Energy Market

Just how volatile has the energy market been in the last two years?

There are about 250 trading days in a year. In 2022, there were 46 days, nearly once every 5 trading days, during which the price of energy changed by at least 7 percent, day over day. That makes 2022 the most volatile year for energy markets in recent history.

Volatility in the energy market affects all consumers. But for the energy-intensive manufacturing sector, a potential increase in energy bills can be especially detrimental.

Considering how the price of energy has fluctuated in the last couple years, it's increasingly important for manufacturers to take a more active approach to energy strategy and take intentional steps toward reducing energy spend. As the energy market evolves, your business' approach needs to evolve as well.

How the energy markets affect manufacturing

Every year, the industrial sector spends billions of dollars on energy. Yet for many organizations, managing energy is perceived as just a cost of doing business. It's worthy of more attention.

Energy prices tend to fluctuate more than the prices of other commodities. And while “market volatility” doesn't always indicate higher prices, it does indicate the potential for significant uncertainty, or a sudden shift in prices. Energy markets are naturally cyclical, but it's been several years since we've experienced volatility and price fluctuations like we have in the last two years. This volatility is due to a few factors:

1. The U.S. energy market is increasingly driven by global energy demands and is influenced by what consumers are willing to pay for American exports of liquefied natural gas (LNG) in Europe and Asia.
2. Our power grid is in the middle of a transition from coal to natural gas to renewable energy sources, and the result is that most of our electricity in the U.S. is now produced by natural gas. In turn, when we see volatility in the gas market, there's a direct impact on the cost of electricity.
3. We're simultaneously increasing our demand for electricity through the electrification of technologies that historically ran on fossil fuels.

Recently, the price of natural gas reached an unexpected low, compared to where it was a year ago. This is due, in part, to the U.S.'s fifth warmest winter since 1950 and the corresponding drop in demand. We can't be sure where prices will go in the future, and we can't say for sure when higher prices will return. But industry experts believe market volatility is here to stay, as many of these fundamentals driving volatility are still present.

One solution for controlling energy costs? Efficiency.

It may sound a bit too obvious to be effective, but the truth is that the first step in controlling your energy spend is reducing your energy consumption. As an industry, manufacturing is among the most energy-intensive in the U.S., making energy efficiency efforts even more impactful. One of your top priorities should be to run your facilities using as little energy as possible.

This can look like replacing outdated equipment, installing occupancy sensors, or retrofitting your facilities with LED lighting, which is now even more efficient than it was a decade ago. At IGS Energy, we've found customers have most success when they tackle energy efficiency efforts in a few steps:

1. Involve operations, maintenance and finance and accounting teams. It's important to bring together the people that can speak to energy usage as well as those who pay the energy bills.
2. Benchmark your energy usage data. A real-time monitoring program can help identify and quantify opportunities for efficiency improvements and verify the impact of the improvements. From here, an organization can most effectively determine when and how they're using energy and how that affects what they're spending.
3. Understand your energy bills. On average, about half of a business' energy bill is driven by the plant's capacity cost, which is a measurement of the largest interval of power used during the billing period. The demand you're billed for is the peak amount of power used at any one time during your billing period; there's no charge for demand during the times when a business is using less than the peak amount. If peak demand is infrequent, working with operations teams can help identify the equipment and processes causing the demand.

Hedging against market volatility

So far, we've examined one factor manufacturers can't control (fluctuating prices) and one they can (energy efficiency efforts). There's one other factor that manufacturers should consider when developing an energy strategy: being proactive.

If you're responsible for a business' energy decisions, you may be wondering if the best strategy is to wait for prices to drop further or to renew your contract before energy prices rise again. In the past, a business might lock in its prices for the year in September and then do so again 12 months later. But now, with longer-term volatility factors in play, it's important to take a longer-term approach. Given the current volatility, analysts suggest that we could range anywhere from $1.30 to $13.00 for natural gas in February 2024.

As far as your plans go, this might mean looking out three to five years when making your energy contract decisions. Long-term energy prices are still relatively affordable, even despite the recent swings in the market.