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9 Factors That Affect the Cost of Energy

Posted by SJI Energy Advisors on Jul 7, 2020 10:30:00 AM

Like many commodities, the markets for electricity, natural gas, oil, and renewable energy are complex – and constantly changing. In fact, most energy prices change hourly.

Fundamental economic factors – like supply and demand – are relatively predictable, but when you add political and regulatory factors to the mix, as well as financial speculation, forecasting energy prices becomes more challenging.

As one of the fastest-growing energy consulting firms in the country and the premier energy procurement specialist in the Mid-Atlantic region, we track the markets daily, analyzing trends and using that information for the benefit of our clients.

In our experience, here are the top ten factors that can influence the price of energy:

  1. Supply. Energy from nuclear, coal, gas, oil, and renewable sources reacts quickly in response to the available supply (or lack thereof). This is a key contributing factor to price fluctuations, which can occur on an hourly basis.
  2. Demand. Demand for heating, cooling, light, and processes varies in response to demand in terms of economic, technological, and efficiency measures.
  3. Gas Storage. This is a term for energy “inventory” (since you can’t store electricity), i.e. the difference between supply and demand. Gas injections and withdrawals are announced weekly, and prices adjust accordingly.
  4. Weather Forecasts. The predicted weather forecast, as well as actual weather events, are important considerations, affecting spot market prices and short-term contracts. Whether the forecast becomes reality is less critical to longer-term prices.
  5. Generation Changes. While seemingly more localized, these changes can have a broad effect on the markets.
    • Nuclear. Retirement of older plants as they require re-licensing can cause fluctuations.
    • Coal. Coal plant conversions to natural gas to avoid scrubbing-technology costs can also cause fluctuations
    • Transport. Across the U.S. there are severe constraints in gas pipeline and electrical transmission capacity, which take time and investment to reverse. With the difficulty of transportation, prices rise.
  6. Global Markets. Despite the massive growth in shale gas production, major changes in global oil supplies can affect U.S. domestic energy costs.
  7. Imports and Exports. Global oil and gas prices determine relative profits suppliers can make selling fuels domestically or overseas. All energy prices are connected to some degree.
  8. Government Regulation. Federal (FERC) and state (PUCs) regulations can change both supply and demand costs quickly and significantly, which, as noted above, affects the cost of energy.
  9. Financial Speculation. Like most other traded commodities, energy prices can be affected significantly by financial speculation, which is the least transparent factor of all. If a market doesn’t seem to be following the direction indicated by supply or demand-related factors, the cause is almost always financial speculation, which is largely invisible and causes unexpected movements.

Unless you’re a professional commodities trader, trying to hit the exact bottom of a market is a fool’s game. Nevertheless, making an informed decision about the most likely direction of the energy markets over the next several years is both possible, with expert help, and necessary to keep your energy costs as low as possible.

Of course, that’s why it’s valuable to have a trusted and experienced energy broker on your team. We will monitor the markets for you, helping you make educated decisions that will ultimately save you money.