This is a special post to address a widely misunderstood aspect of the energy market that business electricity and natural gas users must understand, if they are going to successfully avoid potentially massive rate increases on the horizon. The elections in November, the lame duck congress, and potential introduction of new monetary policy are just a few of the short term risk factors that could rock energy markets in the blink of an eye, sending prices up 20 to 30% or more.
You Don’t Manage Energy; You Manage Risk
The first thing you need to do is to get your mind around the fact that you don’t really manage “energy”, or “energy costs” in a deregulated market. You mange RISK, defined as…
A concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event. In professional risk assessments, risk combines the probability of an event occurring with the impact that event would have.
What is Risk Management?
Risk Management is the process of measuring, or assessing risk and developing strategies to manage it. In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss vs. a risk with high loss but lower probability of occurrence can often be mishandled.
What To Do?
The reason I felt now was a perfect time to bring up the topic of risk management is because we sit here with several future events that are absolutely going to happen, putting the probability of occurrence at 100%. There is no doubt that these events will impact energy prices. The only unknown is by how much. With natural gas languishing at near 8 year lows, the chances of prices going down, regardless of what happens, is rather low. That is because there is a natural floor on natural gas when it gets close to parity with coal, which is where we are at this point. So let’s consider a couple scenarios, and what it could mean for you.
- Scenario #1 – Let’s assume that the republicans take at least the house or the senate. Let’s also assume that the Bush tax cuts are extended during the lame duck congress. I think most would agree that this would lead businesses to bank on less “change” over the next two years, and very well push them to upgrade their economic outlook. We could witness a sea change in economic outlook overnight. Just looking back to price levels over the last year we see energy rates 30% higher than where we are today. In my view, a 12 month look back provides a good range to consider when trying gauge where prices could go in a hurry. The key is to recognize that the rates you could get today could be 30% higher if you wait until November or December to lock in your next contract. If your contract ends anytime in the next 12 months we strongly encourage you to consider how the risk of waiting versus acting now.
Of course, we have no clue how things will play out. Nobody ever does. But there are times such as right now, when very specific risk factors are a given. These facts provide an opportunity to make smart moves to eliminate undue risk. In our opinion the risk of a short term rally is very real, while the possibility of energy prices going down much further is very low.
Contact Us ASAP to Get Rates Before Next Week
Needless to say, this is a very busy week for us as we are shoring up many clients so that they can lock in now and secure budget certainty through 2012. Contact us sooner than later if you would like to get a free analysis of exactly where you stand.