Energy consumption and costs: Covid-19.. a work in progress
Customers are curious about what happened with their energy consumption and costs during Covid-19. It is tempting to simply make assumptions about what likely resulted at customer sites during the pandemic. The details are revealing and may surprise you. Of course, the customer profile and type will determine the extent of the usage and cost impacts of Covid-19. The Megawatt Hour serves a range of clients, from hospitality, to schools and universities, to hospitals and health care.
We have just begun this analysis in depth. In fact, we do not have all the utility data yet so we are not able to draw detailed conclusions yet. However, there are some preliminary findings that are worth discussing.
Preliminary findings: energy usage and cost
For schools, universities, retail, commercial offices, hospitality clients that largely shuttered their operations, weather-adjusted usage declined anywhere from 20-70% during the shut down resulting from the pandemic. Obviously, this is good news for organizations that saw a significant revenue decline during the period.
The less good news, however, is that utility costs (the cost of electricity delivery) dropped roughly a quarter to half as much as energy use. The most significant driver of utility (delivery, not supply) costs is peak demand. (For an explanation of the difference between delivery vs. supply costs, take a look at this article from The Megawatt Hour.) Buildings did not and can not shut down completely, of course. The primary determinant of utility (delivery) cost is peak demand. The customer’s inability to significantly reduce a building’s peak demand will limit the cost impacts of a shut down.
Customers that had some combination of increased usage, with some declines (like healthcare facilities, hospitals, etc.) the picture is a bit murkier. What we typically find is that weather-adjusted usage declined roughly 5-6% while cost did not fall at all.
Energy supply cost (electricity and natural gas) impacts of usage reductions will vary based on the type of supplier product the customer has purchased. Are they on a fixed price agreement? Are there usage provisions in those contracts that tie the customer to staying within a specified band during the term of the agreement? Is the buyer taking supply through some combination of fixed and index pricing? To gain a more thorough understanding of contracts and products, review our contracts series here (index contracts), here (fixed contracts) and here (block and index contracts).
The customers that essentially paid the lowest cost of supply during the shutdown will be the index rate customers. Day ahead market prices fell considerably during this time. Fixed rate and block and index costs will be dependent, of course, on the contract details. In general, those customers on fixed/block & index products will, simply put, have paid more than they would have paid their supplier if they had stayed on utility supply.
While it is early to reach dramatic conclusions when all of the data are not in, there are a few key considerations from these preliminary findings.
- The shut down associated with the pandemic highlights the critical nature of peak demand as a key driver of cost. Technologies that help customers manage peak demand would provide customers with real value. This is not new information, but these data underscore that fact.
- Planning your next contract. When and how?
- Forward markets have been and continue to be low. As price takers, customers should be looking out for lower market rates during this time… take advantage of low market prices.
- Buy the product that suits you best in times of uncertainty. Everyone’s best guess is that there will be shut downs in the future. Try not to commit to a product that limits you to a specific usage forecast. Try to ensure that your supply contract has the same ability to respond to uncertainty that you have.
- Forecasting cost and usage for the coming months will be challenging for customers.
- Budgeting for the next fiscal year will also be challenging. Many customers use last year’s cost and usage as a baseline from which to budget next year’s cost and usage. For more information on how to improve the budgeting process, review this article.
Bottom line for energy managers and finance professionals: The dynamics of the operational changes due to the pandemic shut down highlight the value of lowering peak energy demand. In addition, the complexity of current operational dynamics also suggest that customers could benefit from improved budgeting processes.
Let us know if you would like to receive our final report on Covid-19 energy usage and cost dynamics. Provide us with your email address and we will send you the report. Sign up for our Covid-19 Energy Usage and Cost Report