Energy ‘21: We’re Living in Interesting Times

In this edition of Voices of the Industry, Michael Lahoud, Chief Operating Officer and Partner at Stream Data Centers, shares insights around what’s on the horizon for U.S. energy, market factors that could affect pricing over time, and how to mitigate risk and gain at least some control.

It’s been a unique year in the U.S. energy markets.

One of the defining features has been significant price increases. Natural gas, for example, is about twice as expensive as it was two years ago. (In the chart below, the significant spike in February represents the fallout from Winter Storm Uri.)

Despite a fairly consistent long-term upward trend, energy prices have been increasingly volatile recently. For example, natural gas prices rose about 20% between Thursday the 21st and Wednesday the 27th, but then fell about as much by the end of Friday the 29th.

Reports at the end of September that domestic natural gas stores were 15% lower than the same time last year sent the markets into a bullish run, while some participants remembered that this time last year stores were much higher than normal because COVID-19 quarantines were keeping people at home and demand in check. U.S. natural gas stores are actually just below the five-year average (off just 3% as of this week).

And while the fear was real that mother nature would deal us a repeat of the traumatic 2020-21 winter, the recently released long-term weather forecast could be viewed as quite positive. Most U.S. states are forecasted to be warmer than normal, except in the Northwest, where higher-than-typical precipitation and colder-than-typical temperatures could bring much-needed replenishment to dwindling reservoirs.

On the regulatory front, changes are looming in some of the nation’s biggest energy markets. The power grid operator PJM Interconnection, which covers 65 million people between New Jersey and Illinois, is dealing with unrest from several of its member states over the rules and economics for renewable energy producers. At issue is whether renewable energy plants should be subject to the minimum offer price rule (MOPR) that other state-subsidized producers are; opponents argue the rule would render renewables unable to compete with fossil fuels. Officials in some states have considered pulling out of PJM’s capacity auction; Virginia’s largest utility, Dominion Energy, actually did. However the debate is resolved, it will impact energy prices and available products.

In Texas, regulators are considering a variety of changes in the wake of Winter Storm Uri. One proposal would lower the high system-wide offer cap (HCAP) – essentially a ceiling for real-time power prices – from $9,000 per megawatt hour to $4,500. The HCAP was in effect for several days during Uri and represented a price spike of 75x or higher relative to prices the week prior. The aim is to incentivize power producers to bring more electricity online during times of scarcity, but in reality, keeping the price at $9,000 per MWh “did not bring any more electricity supply onto the grid,” according to the ERCOT CEO at the time. However these regulatory changes play out, energy buyers should reevaluate risk mitigation and spend optimization strategies accordingly.

Energy markets – especially competitive ones – can be somewhat complex. Myriad factors influence energy prices today and tomorrow. And here’s another thing: energy markets move fast. I’m writing this on November 1 and by the time you read it, even just a couple weeks from now, the picture could look markedly different. And that’s exactly the point. While the broad trends are based on market fundamentals, short-term volatility can often be (as Alan Greenspan taught us in 1996) irrational.

Fortunately, there are steps data center customers can take to mitigate risk and gain some control over how these interesting times affect your company’s bottom line.

Be proactive

Even though power is one of the single largest operating expenses in a data center, some operators take the position of ‘price takers’. With a ‘fix it and forget it’ mindset, purchasing energy becomes something the operator handles once a year, or every few years, when they receive a contract renewal notice from their supplier. They sometimes take whatever the utility or energy supplier offers them, without investigating whether pricing, terms, and timing are right for their business (and, in the case of colocation providers, their customers).

In contrast, data center operators that facilitate formal energy procurement governance that enables a proactive and strategic approach to buying energy can potentially negotiate favorable energy contracts and make more informed energy buying decisions. The result is optimized energy spend and mitigated risk – benefits that should extend to tenants and colocation customers.

Know the factors that influence energy prices

Energy prices change on a daily basis, with larger trends developing over months or years. Unless you consistently monitor and understand these ongoing changes, it’s very hard to know what type of energy deal to buy, when to buy, and what to pay.

Factors that influence energy prices include:

• Supply and demand – The power demands and sources of power produced in a certain area (i.e. natural gas vs. solar power) affect power prices. For example, some areas of the country that are dependent on hydro-electric generation are seeing rising costs during recent drought conditions.
• New technologies – For example, the evolution of battery technology and price decline of 97% since 1991 make renewables more feasible as a primary energy source, and economically competitive compared with thermal generation sources. (Without a good storage option, the intermittent nature of solar and wind limits the extent to which they can replace other generation sources.)
• Industry trends – The capacity for the United States to export liquified natural gas (LNG) to international markets has increased dramatically over the past several years. Now, spot pricing in faraway markets like Europe and the Pacific Rim are influencing economics here.
• Weather – A sudden weather event like a hurricane in the Gulf of Mexico, a severe cold weather event (like Winter Storm Uri), or just an unusually hot summer or cold winter can cause energy price volatility.
• Regulation – The regulatory environment varies from state to state. Even in deregulated states, rates can be influenced by rule or law changes.

Get a partner

While this all might sound complicated, you don’t have to do it alone. Whether that means contracting with an energy procurement service for your self-operated facility or colocating with a provider that has an embedded energy procurement team, an energy procurement expert can help you optimize spend, mitigate risk, and achieve your sustainability goals.

When considering an energy procurement partner, look for:

• Industry experience and expertise – Preferably, your energy procurement team should have experts with experience working for energy retailers and generators in both regulated and deregulated energy markets. They should have proven success negotiating contracts with energy retailers, including for renewable energy.
• Commitment to transparency – We prefer a regular cadence of communication to understand evolving market conditions to help manage risks, and seize opportunities as they arise.
• An unbiased view – The right procurement partner will give you an unbiased view of your options, whether the market is going up or down, and recommendations for how to proceed based on your organization’s strategy. You should expect bids from multiple providers, and advice on the most favorable contract terms for your specific deal.

Ultimately, the goal is to have a good line of sight to energy costs – understanding the market can be very dynamic. A data center provider should be to understand and articulate market factors that could affect pricing over time, what strategies they have in place to mitigate risk, and what steps you can take to optimize your spend.

Michael Lahoud is Chief Operating Officer and Partner at Stream Data Centers, which builds and operates for the some of the largest and most sophisticated enterprises and hyperscale cloud providers – 24 data centers since 1999, with 90% of our capacity leased to the Fortune 100. Stream Data Centers embraces the idea that deploying data center capacity should be a great experience. Contact Stream Data Centers to learn more.