New Energy Supply Contracts

We have written a lot recently about New York City’s environmental sustainability strategies and how they can impact your buildings, specifically how to navigate and ensure compliance with the green laws. However, these initiatives can have unexpected ripple effects elsewhere too, like on your energy rates. This, along with other factors, is shaping our view that now is an interesting time to consider signing new energy supply contracts to lock in today’s rates and protect against the market’s anticipation of higher rates in the future.

Both New York State and City have some of the most aggressive climate plans of anywhere in the world. The State has and will continue to deny natural gas power plant renewals in favor of renewable energy with the goal of having a fully renewable grid in the coming years. This puts pressure on capacity costs, as these new renewable energy generation plants and their utility scale batteries will come at a high cost. Further, as NYC’s LL97 takes effect, buildings will be focused on decarbonization. Though complicated, we anticipate an initial wave of oil-heated buildings will convert to natural gas while they can still be granted permits. This may put pressure on gas capacity and drive up basis prices. There will also be early movers from gas to electric heat, which will put more pressure on electricity capacity rates. All these efforts may increase gas and electric capacity rates in the city over the coming years.

The other major wild card impacting outlook is geopolitical tensions. There has been an increase in global conflicts around the world, which has had and likely will continue to have an impact on global and domestic energy rates. The war in Europe continues, while much of the Middle East remains unstable with risk of escalation. Commodity rates are near the lowest levels since the post-pandemic era, but rising conflict could change that.

Building owners, boards, and managers concerned with how these factors may impact the markets, and therefore their budgets, may want to lock in their energy rates. Having the underlying basis and adders in place will allow for execution of commodity hedges when desired. Speaking of budgets, they are typically prepared in Q2 or Q3 for the following year. Locking in rates through next year will provide more peace of mind surrounding this volatile and impactful building expense.

Today might be a window of opportunity to mitigate risk of rising costs, while capturing a favorable blip in the capacity market. Capacity is a measure of an account’s consumption during the period of peak demand for a given year based on a profile of historical energy usage and forward-looking estimates. The NYC capacity auction took place earlier this month, and the market unexpectedly declined a bit, which will reflect positively in contract pricing.

Everyone is so busy these days, it’s easy to gloss over proactivity. We are here to encourage you to think about tomorrow, next month, and even next year. Let’s listen to the market forces and control your costs.

Market Analysis

Electricity

NYISO Zone J has been nothing if not consistent. For yet another month, pricing stayed between $0.02 to $0.03 per kWh. A short-lived spike to $0.07 occurred mid-month after the market was spooked when NYISO announced concern about grid reliability if New York experiences a prolonged heat wave this summer. Concerns were quickly quelled, as May ended back down around $0.03.

Natural Gas

Opening the month of May just below $2 per MMBTU, NYMEX rose steadily for the first time since January. Several factors worked against the market this month. Most noticeably, prolonged and record-breaking heat waves across the South sent cooling demand way up. Increased LNG exports and news of subdued production also weighed on pricing. Still, NYMEX is on pace to close out the month in the $2.50 range, in line or lower than most of calendar year 2023.

Crude Oil

Crude oil futures played out the majority of May without succumbing to volatile price swings, falling between $76 and $80 per barrel. Though the month was relatively quiet, one of the major drivers of movement came when the central bank indicated a higher-for-longer interest rate policy, which could hinder demand from consumers. Reports of changing US stockpile levels and news out of the Middle East were factors as well.