Commodity prices are rising across the economy. Energy is one commodity where rising prices are quickly obvious to the average consumer and small business. When seeking an answer to why are energy prices increasing, it helps to understand the factors that influence the price you pay for electricity and gas.
What’s causing energy rates to go up?You are not imagining things if you are wondering: Are energy rates going up? Competitive energy markets normally constrain prices. Yet, we are experiencing a large number of factors that impact how the market affects energy pricing.
Energy price volatility is the term used to describe how quickly and drastically energy prices can fluctuate, and it’s greater than it has been in the recent past. Global geopolitical events influence the volatility of energy prices, and when those events or conditions compound they create the potential for high overall price levels. Here are some of the reasons why you might have seen an electric bill increase in 2022.
1. Increasing natural gas and coal pricesNatural gas power generation plants have become a preferred source of electricity because natural gas burns cleaner than other fossil units and newer, more efficient gas units tend to be less expensive to operate. Yet, as the economy returns to pre-pandemic levels and world events impact the natural gas market, demand for natural gas is beginning to outpace supply and drive price increases.
Traditional natural gas wells and fracking are producing at near record levels, yet demand is rising faster. The average price paid by power generators for natural gas is up 124%, averaging $8.81/MMBtu this summer. The resulting increases are passed on to electricity customers.
Additionally, the plants that use coal to generate electricity have had to pay more for the coal they burn. The average cost of coal in February of 2022 was $2.18/MMBtu, up 13% over a year ago. It is a case, again, of lower supply and higher costs contributing to why energy prices are increasing for consumers.
2. Climate ChangeScientists expect increases in global temperatures to continue and hotter summers are on tap for the US, according to the National Weather Service’s Climate Prediction Center. Hotter summers will lead to more AC use and increasing demand for energy and thus increase energy prices.
Climate-change-driven weather events, such as the major winter storm in Texas in 2021, can affect power supply as well. The extreme temperatures these events bring increases demand for electricity beyond production capacity. Wind and ice can also disrupt production and distribution. This can lower the supply of electricity when demand is high, resulting in upward pressure on energy prices.
3. Geopolitical conditionsEnergy markets are increasingly global, and political instability around the world affects local energy prices. Recent events like the Russian invasion of Ukraine disrupt the free flow of abundant energy and other commodities. The result is an increase in the price of everything from natural gas to heating oil to coal. Did electric rates go up in 2022? Yes–and that is a trend likely to continue.
4. Supply chain issuesIssues with the supply chain are affecting every aspect of the economy, including the energy sector. The shipping of any kind of fuel is now slower and more expensive. Obtaining replacement parts for maintenance and upgrades is affected by availability and shipping delays. Routine grid maintenance and upgrades are more expensive than usual. Energy price volatility and supply issues are part of why energy prices are increasing. The increases in these costs factor into the price you pay.
How much are energy prices expected to rise in 2022?With so much pressure on so many different factors, it is easy to see why electricity prices have increased. The government is predicting electricity prices will continue to rise in 2022 at a rate of 3.9% to 14.26 cents/kWh. The predicted increases vary by region. Competitive markets that have been deregulated are likely to have more stable prices, yet every market is going to be affected. Unless things change dramatically, the price volatility and potential for increases will continue in 2023.
Understanding energy price volatilityWith so much uncertainty across so many of the factors that influence energy prices, you may see your electricity rates swing up and down during this period of volatility. You can learn more about what factors influence your small business’s energy costs and also get the specifics as to how your small business’s energy pricing is determined.
How energy market volatility affects small businessesEnergy market volatility can affect your small business in several ways.
How to help lower your energy costsWhile lowering your business’s energy costs has always been a way to increase the efficiency and profitability of your business, in today’s volatile market, it is even more important. You will protect your margins and give your business a bit of a cushion against unexpected cost increases if you can lower your small business energy consumption and find ways to lower your small business utility bills overall.
Instead of just wondering why energy prices are increasing, take steps to cut usage and find the most cost-effective options. Explore and compare small business energy options in your market to take control despite energy price volatility