A Look Ahead: Trends Energy Managers Should Anticipate in 20214 min read
Even as we turned the calendar year, COVID-19 continues to dominate market conversations, however, now there is an increased focus on recovery. Within the recovery conversation, there are still many unknowns. To support your business during this challenging time, Constellation market analysts continue provide you with key insights to navigate their energy strategies in the coming year.
Here we cover four emerging trends, from lasting impacts of COVID-19 to continuous momentum in sustainability efforts, that energy managers should anticipate and consider when modifying their energy management strategy. They include:
1. Understand the lasting impacts of the oil market shutdown.
The oil market collapse in April 2020 as a result of stay-at-home orders and a sharp decrease in consumption of fuel meant oil producers were left with a significant surplus. This prompted a shutdown of oil wells, a collapse in oil prices and subsequent collapse in the price of other commodities. Now, as some COVID-19 mitigation efforts and restrictions are being lifted, oil consumption and demand are on the rise. Even so, this event has shifted the production behaviors of oil and shale producers in order to create an environment with less financial risk.
As companies focused on reducing their costs, the era of continuous production appears over, which is expected to affect the price of oil moving forward. These producers may be reluctant to drill for new oil reserves to avoid overproducing and creating a similar surplus to last year. Additionally, it will likely require more upward pricing action than in the past to justify investment and production of more output.
If companies are producing less and it takes more effort to spur new production, consumers may see a shortfall in supply as consumption begins to reach normal levels, and price elasticity of oil supply may get tighter. This unforeseen impact of COVID-19 has caused restructuring by oil producers that is expected to impact the market for years to come.
2. Adjusting to customer energy patterns and potential recovery periods to mitigate demand risk.
In 2020, energy providers experienced increased risk as commercial businesses required closures and work from home operations. As this trend continues into 2021, energy providers will continue to track how this impacts customer energy usage and ultimately, their cost and revenue models.
Energy providers have analyzed customers by industry segment and come up with predictions to forecast pricing. Each month, as actuals are reported, providers learn more about usage and investigate potential recovery patterns in each of these segments. Over time and with more information, providers have continuously worked to adjust pricing to manage the risk in their contracts with unpredictable energy customers. Demand-based charges will be among the main shifts to be aware of over the next year.
When quoting a customer, energy suppliers include the cost of power as well as fixed demand-based charges, which customers owe regardless of usage. The price of power has come down significantly over the past few years, and it is no longer the most expensive line item in a customer cost structure. Now, demand charges far outweigh the cost of power, which pushes the risk on the supplier. Suppliers will continue to be burdened by customer decreases in energy usage, due to improved energy efficiency and accelerated by COVID-19 mitigation efforts. Rather than carry the risk, suppliers are beginning to adjust through premium pricing and new products that separate demand charges from regular energy pricing. As the methodology changes to determine supplier pricing, customers should seek guidance and transparency to ensure they understand new cost mechanisms and the impact to contracts.
3. Continued sustainability leadership and investments by the private sector.
Renewable energy infrastructure investments continue to be driven by the private sector as sustainability remains a recurring theme in the industry. While this is not new in 2021, we’ll start to see the evolution of the infrastructure to meet actual customer demand. This requires the technology to be more flexible, predictable and formal. Better control of renewable energy outcomes begins with more sophisticated technologies like artificial intelligence and machine learning, to create improved modeling of weather patterns and forecasting, as well as ensuring the supply aligns with customer demand. While physical infrastructure and capital is necessary, software prowess stands out as a key component of transitioning renewable demand to customers.
Even more forward looking, energy managers should anticipate continued interest from customers regarding how they procure, consume and track energy usage and their sustainability footprint. Traditionally, mechanisms to track energy outcomes are closed off to the consumer, but as this becomes increasingly important to business models, we can expect an increased focus on technology to help customers understand and rationalize their energy choices.
4. Potential for a steady and more widespread energy policy environment.
The transition to a new administration and continued sustainability momentum at the state level will affect energy policy and how companies can expect to use and manage energy to meet their goals this year. Currently, at both the state and federal levels, energy policy is in flux from capacity market reform to increased carbon requirements through more stringent reporting standards. At the federal level, analysts are hopeful to see more steadiness in regulations in order for markets to stabilize. Additionally, we can expect increased support from the government around clean energy, even as the private sector has already moved full speed ahead. At the state level, we are already seeing an increase in renewable requirements in places like Washington, D.C., Maryland and New Jersey. Further, some states are also requiring that energy supply come from specific sources, like solar, all of which has an upward impact on pricing. We can expect to see continued and more widespread energy regulations over the next year.
Despite the shutdowns and decrease in commercial and industrial consumption in 2020, analysts expect a continued rebound in the demand for power. Demand for natural gas is surprisingly strong and will still be the largest area of consumption in power generation. Through innovation and corporate resiliency to balance supply and demand and charge forward with sustainability efforts, there are positive economic and energy signals moving into 2021.
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