The winter of 2016-2017 is the subject of mixed predictions for length and severity. According the National Oceanic and Atmospheric Association (NOAA), Northeast Ohio and the Midwest have been under a “La Niña watch,” which means conditions are favorable for cooling of sea surface temperatures in the Pacific Ocean, translating to a very cold and very wet winter for Northeast Ohio. In late August, the La Niña watch was dropped, and the regions were designated to be in neutral conditions, which favors a mild winter.
Weather, however, is reliably unpredictable. That makes using forecasts to get a sense of your company’s energy usage, particularly when it comes to natural gas, a gamble.
Smart Business spoke with Roger Zona, president of TPI Efficiency, about how the weather predictions may or may not influence your company’s energy budgeting and what you can do to mitigate costly price swings.
Given NOAA’s changing prediction for the coming winter’s weather, how can businesses plan for something that is uncertain?
The canceling of La Niña is a fairly significant meteorological event considering that La Niña effects typically have a strong impact on weather in the Midwest. Given NOAA’s fluctuation, the decision to ‘roll the dice’ on natural gas rates — in other words, not taking any action to lock in rates at favorable levels in anticipation of mild weather — is a really big and impactful decision for many businesses. And it’s a decision that shouldn’t be left to chance.
Take into consideration that even though this year’s winter may be predicted to be mild overall, this is Northeast Ohio and businesses can still expect at least a couple of severe winter storms and cold snaps. Unfortunately, one perfectly timed, prolonged cold snap can spike natural gas variable rates dramatically, causing budget projections to become obsolete while quickly eating up any of the savings businesses were hoping to cash in on.
How does the weather’s unpredictability affect the energy costs incurred by businesses?
Take a look at your company’s natural gas usage patterns and the energy markets as a whole when determining the strategy you’ll take heading in to this winter. The price of natural gas is currently at near-historic all-time lows. Businesses can still secure fixed natural gas rates between $3 and $3.99 per MCF versus Dominion Ohio’s Standard Choice Offering (SCO) variable rate price of $2.80 per MCF. Although this may seem like a significant spread on a per MCF basis, a business needs to analyze their specific natural gas usage and determine the true risk.
Many businesses are primarily ‘heat load’ natural gas users, meaning they use a significant portion of their annual usage when it is cold outside. As a result, a variable rate program typically has the greatest chance of spiking in the months during which there is the greatest potential to use the most natural gas. Reflectively, your exposure to risk on this plan is actually much greater than you may be anticipating when simply comparing a variable rate from September to a fixed rate program that protects you all winter long.
What can businesses do to avoid the risk of natural gas price increases?
Although many businesses might be hoping for a mild Northeast Ohio winter as NOAA now expects will be the case, it’s rarely a wise decision to gamble against Old Man Winter. If anything can be guaranteed it’s the promise of unpredictability. The best thing businesses can do is lock in their natural gas rates today while those rates are still near historical lows. Doing so will ensure that the business is insulated against the chance of price spikes.
Insights Energy Solutions is brought to you by TPI Efficiency Consulting