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What Is Driving Your Electricity Bill Higher

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Patrick McGarry's picture
Senior Director PCI

Patrick recently joined PCI as a Senior Director in May, 2019. He owns over 32 years of experience in commodity trading and owns an extensive record working closely with energy market...

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  • Oct 22, 2021
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WHAT IS DRIVING YOUR ELECTRIC BILLS HIGHER

As if we did not have enough challenges and uncertainties in the final months of a global pandemic, we are receiving an unexpected farewell gift: skyrocketing electric bills.

Why is this happening?

Dealing With High Electric Bills

Supply and Demand

Supply is the quantity of a commodity made available by the producers to its consumers at a specified price.

Demand is the desire of a buyer and their ability to pay for a particular commodity at a specific price.

Today, global demand for natural gas is soaring, and supply is woefully lacking.

“There are snakes that go months without eating. Then they finally catch something. But they are so hungry, they suffocate while they are eating. One opportunity at a time.”

Don Draper / Mad Men

In many ways, the reawakening global economy is like the suffocating snake.

Thanks to nearly two years of anemic economic activity due to COVID-19, the world went months without consuming our traditional amount of natural gas.

But the V-Shaped economic recovery now has the global economy so hungry for gas and oil; we are suffocating on supply chain challenges experienced by nearly every commodity.

Many folks now realize that electricity does not come from the wall.

Even though the United States introduced the Shale Revolution in 2006 and brought energy independence along with a tsunami supply of oil and gas, we are not immune to the current price shock of today’s energy markets.

Just look at your latest utility bill.

What You Will Learn In This Post

In this PCI blog post, we will cover:

  • Why is my power bill so high?
  • How long will this likely last?
  • What will be the long-term impacts?

One thing we knew yesterday, we know today, and we will know tomorrow.

If you want stable prices, you need production to meet demand.

Not government intervention.

Why Is My Power Bill So High?

Capital has a funny way of flowing to places where it feels most welcomed.

So does natural gas.

Liquefied natural gas (LNG) prices have jumped from record lows to record highs in less than a year and a half, with the market first suffering from the pandemic’s impact and now struggling to keep up with a global recovery in demand.

European Day-Ahead Average Prices in 2021
European Day-Ahead Average Prices in 2021

Economic resurgence, combined with a chilly northern hemisphere winter and a scorching summer, boosted demand while production issues hindered supplies. Moreover, recent power cuts and outages in China due to coal shortages have only increased the struggle for energy sources between Asia and Europe.

As a result, LNG prices recently surpassed $34 per million British thermal units, up from just under $2 MMBtu in May 2020, while European gas prices are up 300 percent this year.

At the pandemic’s beginning, natural gas and oil drilling were drastically curtailed because no demand existed. But, unfortunately, it is not so easy to stop drilling and then begin again very quickly.

So when the economy began to recover once the vaccines became available and distributed quickly, the demand for natural gas soared while the supply remained severely limited.

We became like the snake that had gone months without eating and then tried to eat too much too quickly.

Abracadabra. Hocus-Pocus. Hello, energy price shock.

Even in the land of abundant shale supplies, prices are rising.

How Long Will This Last?

Somebody once asked me, “How good is your Locational Marginal Pricing model?”

I replied, “If it were perfect, I would not be here selling it to you. I would be trading on it for myself.”

Nonetheless, we need forecasts to establish budgets. Residential and commercial entities need to estimate energy costs to run households and businesses.

When I need a forecast, I turn to my good friend and energy industry expert Mike Zaccardi. Mike has a knack for looking at the big picture and relying on charts and data to share insights.

“How long will these high energy prices last?”

Natural gas is a commodity, after all, and so Mike naturally decided to first look at the big picture of commodities.

10-Yr Rolling Commodities
10-Yr Rolling Commodities

What about natural gas?

Natural Gas Future Prices

Natural Gas Future Prices ($)
Source: Bespoke Weather

There is extreme backwardation in the natural gas futures market–near months trade at a massive premium to outgoing months. Still, there has been a rally in future years. The market expects natural gas to be in the $2.75-$3.50 range in the coming 3 to 6 years.

According to Mike, “There is a reasonable likelihood that commodity prices, namely energy prices, are in the early stages of a long-term upward cycle. But, fundamentally, years of under-investment and a lack of CAPEX have left the old economy in relative shambles compared to the digital economy.”

“From a technical perspective, the Bank of America chart indicates commodities have begun a new bull cycle. Previous cycles lasted many years–even decades.”

“The year to hedge natural short positions was 2020. Those generational cheap prices are gone. Market psychology is changing too. Traders, funds, and even politicians are quickly realizing that elevated energy prices appear here to stay. While the market will find its footing in the coming months, a new energy bull market might already be underway.”

The acceleration of renewable energy integration coupled with the elimination of coal will increase demand for essentially the only fuel available to handle the intermittency of wind and solar power.

One more development should solidify the bull market for energy.

The “Electrification of Everything.”

According to a study from Princeton University, electrifying nearly all transport and buildings could contribute to doubling (or more) the amount of electricity used in the U.S. by 2050. That would lift electricity’s share of the total energy used to close to 50% from about 20% today.

It looks like higher energy bills will be here to stay in the future.

High Energy Bills

Long Term Impacts

Rising electric bills pose both short-term and long-term challenges.

Almost all states have executed extended moratoriums on utility disconnections because of COVID-19.

“Many homes found themselves unable to pay electricity, water, and telecommunications utility bills, resulting in potentially substantial utility debt and financial repercussions to utilities,” according to a report by the National Governors Association.

Low-income households may have dug themselves a deeper hole because of the moratoriums: they still owe back bills that have been stacking up, leaving them with possibly insurmountable debt.

In late 2020, electric and gas utilities had $32 billion in arrears, with up to 20% of homes behind on utility payments. As a result, thousands of dollars in arrears have piled up in the accounts of many low-income households.

How will utilities address these unpaid balances? The question becomes more complicated as time passes by and precedents become set.

Somebody will need to pay these imbalances.

How will low-income households fare in a new era of substantially higher power bills?

How will these bills impact the teleworkers staying home and absorbing a power bill double or triple in the future?

Conclusion

Haruki Murakami once said, “When you come out of the storm, you won’t be the same person who walked in. That’s what this storm is all about.”

The energy industry in a post-COVID-19 world will not be nearly the same as before the declaration of a national emergency on March 13th, 2020.

The clear evidence of this transformation will be written in our energy bills for the next decade, perhaps longer.

Higher energy bills will spur conservation and, ultimately, digital solutions to control costs.

The pilot has turned on the “Fasten Seatbelts” light as turbulence lies ahead.

This article first appeared here:

https://blog.powercosts.com/2021/10/21/what-is-driving-your-electric-bills-higher/

 

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Matt Chester's picture
Matt Chester on Oct 22, 2021

Do you expect the normal of higher bills will be widely accepted as 'it is what it is' or will there be enough pushback that policymakers will feel the need to step in in some way? 

Patrick McGarry's picture
Patrick McGarry on Oct 22, 2021

Matt- I believe in free markets.  If "policymakers" do feel the need to step in some way, I hope its in the spirit of let's be less hostile to natural gas. I believe that we need natural gas to help achieve extremely ambitious carbon reduction goals. I think that we have no choice to accept "it is what it is". The utilities are already billions in the hole for unpaid bills due to the pandemic. I lived through the 70s and we will need to learn to conserve. I also think technology will help to a degree. Lets face it, we have been spoiled by extremely low prices during the past 15 years ( in addition to virtually zero percent interest rates) and I think its all changed now.

Bob Meinetz's picture
Bob Meinetz on Oct 22, 2021

"The acceleration of renewable energy integration coupled with the elimination of coal will increase demand for essentially the only fuel available to handle the intermittency of wind and solar power."

Either that, or advanced nuclear will replace all of the above, eliminate the nasty CO2, NOx, and SO2 emissions of "natural gas", avoid the nasty land use impacts of renewables, and lower consumer prices, to boot.

I prefer to look on the bright side of things!

Patrick McGarry's picture
Patrick McGarry on Oct 22, 2021

Bob- Always appreciate the feedback. And I agree with you on nuclear. And I also agree with you on looking at the bright side. If the goal is carbon reduction, lets reduce carbon yet not pick winners and losers. There is no feasible way right now to eliminate nat gas. Nothing else can realistically handle the intermittency of a portfolio largely based on solar and wind. I live in Florida and people will die by the thousands if we decide occassional blackouts are acceptable.

Bob Meinetz's picture
Bob Meinetz on Oct 23, 2021

Patrick, and I agree with you that only natural gas can realistically handle the intermittency of a portfolio largely based on solar and wind. But let's look at the root of the problem, and it's not natural gas - it's solar and wind. If we continue to build solar and wind, in Florida or anywhere else, there will never be any feasible way to eliminate nat gas. According to the Florida Reliability Coordinating Council, nat gas will only increase for thirty years into the future (green, in image below).


Believing solar and wind are acceptable is equivalent to believing climate change is acceptable. Then, by 2050, people will be dying by the tens of millions - each year -  and among the most vulnerable, to sea level rise and Atlantic superstorms, will be Floridians.

Patrick McGarry's picture
Patrick McGarry on Oct 25, 2021

Bob- Now I understand your point. And I do agree.

 

.

Peter Farley's picture
Peter Farley on Nov 18, 2021

That assumes Florida does not build offshore wind or excess solar, particularly east west solar on roofs, or get serious about agrivoltaics which protect crops and stabilise farm income or use vehicle batteries to stabilise the grid etc. etc. 

Having said that I suspect it is too late to save much of Florida. Even if we went to net zero tomorrow temperatures and sea levels will keep rising for the next 15-20 years

Peter Farley's picture
Peter Farley on Nov 17, 2021

Germany which has a much higher manufacturing share of GDP than the US uses 425TWh for US$4 trn GDP. or roughly 110 TWh/$trn. The US uses 4,100 TWh for a US$21 trn economy 195 TWh/trn. If the US closed the efficiency gap with Germany by half it would reduce electricity consumption by 900 TWh. Higher prices will force moves to improve efficiency.

Even though the price of wind and solar will have risen 10-15% over the last year that is trivial compared to the price rise of gas, therefore customers and utilities will speed up their plans to introduce renewables and some storage. The US has huge scope to increase its installation rate of wind, solar and storage. Australia which has about 1/25th of the skilled workforce that the US has, is installing about 7GW of wind and solar and 0.5 GW of storage per year. Proportionally the US could be installing 175 GW of wind and solar and 12 GW of storage.

So if the US used energy efficiency to reduce demand by only 1% (40 TWh) per year and took 4 years to ramp up to installing only 70 GW of solar and 50 GW of wind per year, the increase in renewable output would reach 320 TWh per year. Within six years years you could effectively eliminate the equivalent of all coal generation without increasing gas generation. In practice, both coal and gas would fall.

Unless gas prices fall significantly, gas in fact will take most of the hit as it has in Australia where gas generation has halved in the last 5 years. Even in Germany where nuclear generation has halved and coal fallen by 40% since 2010, gas has also fallen by 20%

The other interesting fact that comes from observation of Spanish, German, British and Australian grids is that very high levels 40-70% of renewables can be achieved with very small increments in storage. More flexible operation of existing hydro, load  shifting and demand response will carry most of the heavy lifting 

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