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Energy Pricing Factors

Thursday, May 26, 2016 ENERGY 101ENERGY PRICING FACTORS

Energy Price Volatility – What Are the Energy Pricing Factors?

Do the different M&M’s® colors taste different? Do Lipton® employees take coffee breaks? There are plenty of unanswered questions in life we ask ourselves on a daily basis. We all most probably have an opinion on them, without even knowing the right or wrong. It’s kind of the same thing in the energy industry.

There are many factors that affect the price of energy. Obviously, some factors affect it more than others, but despite all the expert opinions, projections, and estimates, it still remains almost impossible to predict. The fact is that anyone in the energy industry wishes they had a crystal ball that predicts future pricing, but they don’t and neither do we. Although, we would love to have one, so let us know if you do. Seriously, let us know.

Crystal ball aside, here are our top 7 factors that we believe greatly influence the price of energy:

1. Weather Conditions

Climate change and Mother Nature do like to play games with us. Sometimes that means a nice sunny day with a cool drink by the pool, other times it’s a little less relaxing. Extreme temperatures can increase the demand for energy, especially for heating and cooling. Severe weather can also damage equipment.

2. State of Economy

The classics case of supply-demand we all know of. During periods of economic growth, the increased demand for goods and services in the commercial and industrial sectors generates an increase in both electricity and natural gas demand. Simple.

3. Storage Level

For some energy types such as natural gas, storage helps to meet seasonal and sudden increases in demand, which otherwise may not be met by domestic production and imports.

4. Importation

Most energy consumed in North America and Europe comes from domestic production. But in those instances where we can’t act local, we think global. Importing energy has become more and more common over the years. Normally, it is more expensive to get something from someone else than to make it yourself, right? Same goes for energy.

5. Age of Infrastructure

Maintenance on energy related infrastructure like transmission lines and storage hubs will always have an effect on cost, but it isn’t always negative. If an existing asset is producing electricity long after its capital costs are paid off, it can have a positive impact on price.

6. Competition

The large-volume energy consumers and electricity generators can switch between natural gas, coal, and other energy sources depending on the cost of each one. When demand increases, the use of more expensive sources such as natural gas or wind may be needed, which may lead to high overall energy costs.

7. Government Regulations

In a deregulated energy market or not, the government will always some sort of say in energy. In fact, more and more attention has been given to energy in the past years. Strict regulations on fossil fuels and CO2 emissions are continuously been implemented across the globe, which will eventually effect the way we procure and use our energy.

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