These price increases were caused by several factors: fewer power plants are available, demand for electricity is higher, and new FERC-approved market rules have been implemented to better manage reliability during extreme weather events.
For energy generators, these high prices underline the urgency of investing in new power projects or upgrading existing infrastructure. For businesses, the main challenge will be managing these rising costs.
Let’s explore the impact of these auction results and the energy procurement strategies businesses can use to manage higher costs.
The Impact on Energy Procurement
Traditional energy procurement, often involving fixed-price contracts, is becoming harder to manage due to volatile capacity costs. Suppliers are more cautious because predicting these costs incorrectly can be risky. So, the industry is moving towards variable, true-cost pricing models, which offer more flexibility and reduce financial risks from unexpected capacity charges.
Businesses now need to adjust their energy procurement strategies to match this new reality. Erin Schmerschneider, Director of Energy Advisory at Pilot Energy, recently said, "The days of having a fully fixed, all-inclusive contract are going to be either gone or limited to one-year terms." Flexible pricing models that consider market changes and cost fluctuations are becoming essential. Also, closely monitoring energy market opportunities will help manage rising demand costs.
Energy Procurement Strategies for Businesses
To manage these challenging times, businesses can adopt several strategies to reduce potential cost impacts:
• Peak Load Contributions (PLCs) Management: One effective way to manage energy costs is by controlling PLCs. Businesses can achieve this by reducing their load during the five highest usage hours of the year. This proactive approach can significantly lower annual capacity charges. The period between June 1st and September 30th is critical; identifying potential peak days and reducing load during these times can lead to substantial savings for the following planning year.
• Demand Response Programs: Taking part in demand response programs can provide financial incentives for businesses that reduce their load during peak times. These programs reward businesses for shedding load when the grid is under stress, helping to offset some of the increased costs associated with high energy prices. This not only helps in managing costs but also contributes to grid stability.
• Efficiency Projects: Implementing energy efficiency projects can help reduce overall energy consumption, which in turn lowers PLCs and capacity obligations. Practical steps include upgrading lighting systems to more efficient LED options, optimizing HVAC operations to ensure they are running efficiently, and installing advanced energy management systems to oversee and control energy use. By lowering overall consumption, businesses can directly reduce their energy costs and improve their energy profile.
• Behind-the-Meter Solutions: Investing in behind-the-meter projects, such as on-site generators or solar panels, can help businesses reduce their dependence on the grid. These solutions not only enhance energy reliability by providing a backup during grid outages but also contribute to long-term cost savings. Generating your own electricity on-site can dramatically reduce the perceived load on the grid, making it a key strategy for managing energy costs and ensuring reliability.
• Energy Advisory Services: Working with our knowledgeable advisors at Pilot Energy can make a big difference. We provide tailored strategies to help businesses thrive in this complex PJM energy market. Our Insights into market trends and regulatory changes keep your business agile and responsive.
Looking Ahead…
The impact of these auction results will continue to shape the PJM energy market and business operations. The current high prices are likely to persist unless significant new generation capacity is added or regulatory changes occur. Businesses must prepare for continued high clearing prices and plan accordingly.
PJM is working to process 72,000 MW of new resources in 2024 and 2025. However, challenges like financing and supply chain issues are slowing down new-generation projects.
The next PJM capacity auction, expected at the end of this year, will provide further insights into the market's direction. However, businesses should anticipate similar, if not higher, clearing prices and adapt their strategies to remain competitive. Additionally, regulatory interventions and potential investigations into the recent price surge could influence future market dynamics.
About Pilot Energy
Founded in 2001, Pilot Energy is an unbiased and independent energy procurement advisor that empowers leaders to confidently know when, where, and how much energy to purchase by leveraging our unique blend of industry knowledge and innovative digital platforms. Putting our know-how to work daily, we drive clarity and control in decision-making and take pride in providing unparalleled personalized service. Guiding businesses with strategic innovation while committing to sustainable solutions.
Ready to optimize your energy procurement strategy? Schedule a consultation with our energy experts today and start navigating market timing and volatility with confidence.