Energy Prices Rise as Covid Related Shortages Occur

The New Year started on a sour note for energy providers. The US Energy Information Agency (EIA) reported that energy prices listed in the S&P Goldman Sachs Commodity Index (GSCI) ended 2021 59% higher than the previous year. The global pandemic as well as the challenges in shifting from fuel based to renewable energy sources were reasons for the rise.   

The Energy Mix Morphs

The energy mix is changing. Renewable energy sources, defined as wind, hydroelectric, solar, biomass, and geothermal energy, are gaining traction. In 2020, they generated 834 billion kilowatthours (kWh) of electricity, or about 21% of all the US electricity, in 2020, according to the EIA. Only natural gas (1,617 billion kWh) produced more energy. For the first time, renewables passed both nuclear (790 billion kWh) and coal (774 billion kWh) in usage. This boost was due to a steadily increasing reliance on wind and solar.

But in 2021, U.S. coal-fired generation increased 22%, the first production boost since 2014, according to the EIA.  Why? Natural gas prices increased significantly during the year: The year-to-date delivered cost of natural gas to US power plants averaged $4.93 per million British thermal units (Btu), more than double last year’s price. Meanwhile coal prices have been stable making that energy source much more attractive to utilities and driving usage.

The Pandemic’s Ripple Effects  

In addition, the energy price increases stemmed from a shift in demand from the COVID-19 pandemic. Usage patterns quickly morphed. The health care crisis also interrupted supply chains. Employees have not been willing to return to work, so the materials have not been available.

These changes impacted almost all markets, but energy has been hit especially hard. Its 59% jump is almost three times higher than other commodity indexes in the GSCI. They rose by about 20%.

The different market factors have made it very challenging for utilities to plan,, and plan accurately. The pandemic has ebbed and flowed. A major spike in cases has now been occurring around the globe due to the Omnicron variant. Previously, the roll out of Covid vaccines was expected to stop the spread. Uncertainty often produces pricing volatility because energy companies need to put backup measures in place.

Utilities have faced many challenges as they try to migrate from dirty to clean energy sources. The pandemic and its uncertainty further exacerbated the issue. Consequently, they face a growing number of unknowns as they try to manage their energy loads in 2022, and such market conditions have negatively impacted energy pricing.