Guiding Manufacturers Through the Latest Energy Market Trends

Amidst swift environmental changes and regulatory shifts, today’s manufacturers encounter a twofold challenge: maintaining competitiveness in a dynamic market and embracing sustainability. In a shifting energy landscape, industry leaders must adapt to new trends to optimize operations, mitigate risks and seize opportunities.

Consider the following to be essential strategies for navigating fluctuating energy prices and maximizing renewable energy incentives effectively.

New SEC regulations: GHG disclosure. In March 2024, the Securities and Exchange Commission (SEC) issued guidance on greenhouse gas (GHG) disclosure requirements, necessitating disclosures such as climate-related risks, carbon-reduction goals and material scope 1 and 2 emissions (for large, accelerated filers and accelerated filers only). The adopted rules were less aggressive than initial drafts, and requirements relative to board-level climate-risk expertise and scope 3 emissions disclosures were removed from the final version.

While initially seeming burdensome, manufacturers can leverage their product offerings to allocate scope 1 and 2 emissions, distinguishing themselves by appealing to their buyer’s sustainability efforts. SEC disclosure begins in 2026 (using 2025 data), so completing a scope 1 and 2 inventory should be a 2024 goal.

Energy efficiency: solving for more expensive projects. Many manufacturers have already identified the easiest projects (such as lighting upgrades), so attention is turning to energy-intensive activities. Whether it’s re-commissioning, replacing aging equipment or installing more sensors to drive improvements, manufacturers are targeting bigger sources of energy use. Notably, ongoing releases of incentives under the Inflation Reduction Act underscore the importance of maintaining a project list to swiftly respond to available funding sources. Additionally, there is an increasing number of low- or no-capital expense financing options, so high project costs should not prevent projects from being completed.

Rooftop solar: better than previously thought. With the Inflation Reduction Act offering increased incentives for rooftop solar, coupled with escalating energy rates, solar’s value has surged. Like efficiency projects, the upfront cost of solar installation might give pause to some. However, Power Purchase Agreements (PPAs) offer a widely favored financing alternative.

When considering a PPA, beware of two common pitfalls, the first being an inaccurate cost comparison. On-site solar will always reduce energy charges (kWh) and it can reduce demand charges (kW), but might not necessarily do so. The best analyses will model these two elements separately.

The second common pitfall is assuming annual energy rate escalators that are too high. A too-high escalator can overestimate savings, a problem that becomes especially acute when baked into a 20-plus year agreement. The best analyses will use historical data not just from the last year or two, but from the last decade or two, in order to develop an appropriate escalator to use in financial models.

Natural gas volatility: manage with layered purchasing. Over the past few years, gas prices fluctuated dramatically, reaching both decade highs and record lows due to compounding factors such as COVID-19 and the Russian-Ukraine conflict. After enduring prolonged high prices, demand eventually shifted, which was particularly evident in Europe where renewable energy began to replace electricity from natural gas power plants. Consequently, as demand changed, prices began to decline, and with prices now at a low point, production is beginning to reduce accordingly.

One procurement strategy involves riding the highs and lows of the index, which might be the most cost-effective approach over decade-long periods, but results in significant year-over-year cost fluctuations. The other extreme is to fix all your purchasing at once. This provides budget confidence, but is the most expensive. Plus, it still can have significant volatility depending on when you fix your budget. A layered hedge strategy provides the “goldilocks” strategy, being the least volatile and offering moderate cost reduction. The best layered hedge strategy uses market analytics to inform buying decisions and monitors market pricing years into the future to take advantage of the opportunities when pricing cooperates.