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Energy Efficiency Improvement Program Newsletter

Vol. 4, Issue 2 • June 2010

Time to Buy Low in Electricity

By by Paul G. Neilan, GEV Corp.

Electricity market prices have reached historic lows in the Chicago area. For large electricity consumers such as hospitals, that's at least one silver lining in the cloud that's been hanging over the economy for the last two years.

The electricity market is volatile, and prices change every day as well as during the day. To put the current electricity market in context, in late June 2008, three months before the Lehman Brothers collapse, forward wholesale electricity market prices for the years 2011 to 2013 were above $60 per megawatt-hour (MWh), or 6 cents per kilowatt-hour. By the beginning of May 2010, market prices for the same periods were ranging between $30 and $38 per MWh. In other words, wholesale electricity prices for these periods fell by up to 50% in less than two years.

These wholesale electricity market prices reflect only the commodity price of extremely large blocks of electricity and do not include other cost components that retail customers pay, such as ComEd delivery charges. But they demonstrate that now is an excellent time to be an electricity buyer and lock in low prices under a long-term contract, especially if buyers can group together to enhance their purchasing power. With expert assistance, it is possible to lock in all of the components of the retail electricity price, with the exception of ComEd delivery charges.

Even hospitals that are already under contract can take advantage of the current market. It's commonplace for a customer whose electricity supply contract terminates months in the future to enter into a forward contract now that locks in today's low prices for a contract term that begins when the current contract ends.

In this strong buyer's market, hospitals should prefer a fixed-rate electricity supply contract to one in which all or a portion of the supply price varies with the market. The economy is showing some signs of recovery, with projected GDP growth at 3.4% for 2010. As industrial activity picks up, demand for electricity will increase with an accompanying increase in electricity prices. Weather-wise, the latest 2010 forecasts predict above-normal hurricane activity, and if these storms do occur, natural gas prices can be expected to increase, which also will also put upward pressure on electricity prices.

In light of all these factors, hospitals should take advantage of the current electricity market to lock in electricity prices for as long as possible. Hospitals also should strongly consider locking in future prices for natural gas because these prices also can be locked in low in the current market. In our era of ever increasing healthcare costs, the bottom line is that long-term electricity supply and natural gas contracts are currently an effective way to reduce very large budget items for hospitals.

GEV Corp. is a Chicago-based energy consulting and brokering firm.

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