As with the price of other commodities, energy prices fluctuate. Lately, these markets have been nothing short of volatile. This matters because energy spend makes up 3-5 percent of the average restaurant’s operating costs.
In a volatile energy market, a restaurant business is going to benefit most from a proactive approach. Here are some of the reasons behind recent price fluctuations, and tips for how restaurants can have more control over their energy spend.
Understanding energy market volatility
The price of natural gas, which influences the price of power, more than doubled in the last half of 2022. In fact, twice last year, energy reached almost $10 per MMBtu. (MMBtu is the acronym for Metric Million British Thermal Unit, a standard unit of measurement of natural gas. You’ll often see this used in updates on the price of energy.)
Looking at natural gas prices over the last year, the sharp dips and rises were due to several factors, including the extended, unplanned closure of a liquefied natural gas (lng) processing plant in June. A lack of severe winter weather resulted in energy prices dropping even further in recent months. Though this is always a possibility, it was not expected.
Taking advantage of a dip in the market
The price of natural gas is currently sitting at an extreme low compared to where it was a year ago. But what does this mean for the market going forward and for your restaurant? Will the volatility of 2022 continue, or was it a fluke? If you’re responsible for a restaurant’s energy decisions, you may be wondering if the best strategy is to wait for prices to drop again or to renew your contract before energy prices rise again.
While we can’t see into the future and can’t say for sure when higher prices will return, many in the energy industry believe that market volatility is here to stay. This is due to factors that include ever-rising energy demand, increasing LNG exports, and the broader electrification of things like vehicles, as well as heating and cooling.
According to the World Bank, global natural gas and coal prices are expected to drop overall in 2023 after hitting record highs in 2022. Despite this decline, energy prices this year will still be 75 percent above the average over the past five years.
The good news? Unlike eggs, you can lock in the price of your energy. And current low prices offer a big opportunity. By working with your energy partner on your strategy ahead of time, you can make decisions quickly when the market is most favorable. Restaurants that locked in their rate when the market was lower than it is today know all too well the benefits of being proactive.
In collaboration with my team’s market experts, I’ve helped educate my restaurant customers to spot opportunities and make moves at the right time. One customer—a restaurant located in northeast Ohio—was seeking more control over their energy costs, which represented a significant portion of their overall operating expenses. Another customer, with two restaurant locations in central Ohio, wanted greater insight into changes in the market. Both were able to save money by taking a proactive approach to energy management.
By partnering with an energy supplier that has strong market expertise, you can take advantage of proactive market monitoring and adjust your strategy over time.
Taking control of your energy costs
Another effective energy strategy for restaurants? Efficiency. About half of your restaurant energy bill is driven by your energy demand, which is a measurement of your largest interval of power used during the billing period. (Consumption, on the other hand, is a measurement of the total quantity of power you used during that billing period.)
The demand you’re billed for is the peak amount of power used at any one time during your billing period. You aren’t charged for demand during the times when you’re using less than the peak amount. Energy efficiency efforts typically help you save money by lowering the demand required to run your operations. In turn, being able to flex your energy load through efficiency solutions is one of the simplest ways to reduce your energy spend.
To get started with an effective energy efficiency strategy, it’s important to understand your energy data. Some energy suppliers can support, or completely manage, this analysis. As for quick swaps that will make a major impact, consider retrofitting your restaurant(s) with LED lighting. Today’s LED lights are even more energy efficient, consuming up to 90 percent less energy than incandescent bulbs.
The perks of being proactive
When managing your energy contract, procrastination is not your friend. In fact, you may want to consider your options long before your energy contract is up for renewal. Future energy prices fluctuate. During periods of volatility, “waiting it out” may seem like the most appealing (and smart) choice.
It’s important to work with an energy supplier who offers contract options of multiple lengths and is proactively monitoring and modeling the market to further optimize energy strategies. Adding certainty to your restaurant operating budget by locking in your rate is not only doable, but highly recommended based on current market trends.
Andrea Wilkins is the senior manager of commercial and industrial sales for IGS Energy. In her 12-year career at IGS, she’s focused on helping restaurants develop the most effective energy strategies for their unique needs. IGS has worked as the direct supplier for the Ohio Restaurant Association, and works closely with restaurants such as J. Liu Restaurant & Bar and Berardi’s Restaurant to develop cost-saving sustainability strategies.