April 1, 2018

Volatile Energy Market Could Hit Texas Hospitals

Recent changes in the Texas energy market mean hospitals likely need to rethink their energy-buying strategies. With changes in supply levels and energy sources, hospitals may consider Spring 2018 to be the right time to review, and potentially renegotiate their existing energy contracts to adjust to the changing market.

Production Trends, Narrowing Buffers and Unpredictable Temperatures

The closure of several coal power plants over the last two years has increased the likelihood of electricity shortages this summer when demand typically is high. While the utility of coal may currently be up for debate politically in the United States, the coal plants closed as a result of increased competition from modern natural gas extraction methods, such as hydraulic fracturing, that yield a much cheaper energy source than coal.

While natural gas may be causing coal competitors to lose out in the larger energy market, the production of natural gas has yet to catch up to the gap in demand left by taking a number of Texas coal plants offline. Another area of concern is that with such a large percentage of Texas’ energy needs being met by one source, natural gas, because if anything were to happen to either the supply or the price of gas, the energy market as a whole would be greatly impacted. Wind power is increasingly supplying the state’s energy grid, while solar and nuclear contribute as well, but natural gas provides the lion’s share. A hit to gas production would have significant consequences.

The coal plant closures resulted in a reduction of reserves, which already has had a dramatic impact on summer energy rates for Texas in for 2018. Hospitals with contracts set to expire in 2018 will have to evaluate the market in depth to mitigate the rise in prices.

However, the long-term impacts may be less significant for hospitals. The coal plant closures are recent, which means the impact has yet to affect long-term energy prices. Texas has had a large surplus of energy reserves for many years, and a majority of market participants expect the reduced generation to be replaced within a few years. That could change, however. Very little gas-fired generation has been planned or added to offset the coal-fired plant retirements.

“Prior to the coal plants closing, we had reserves in the neighborhood of 20 percent,” said Perry
Ruthven, managing director of the Houston region for Priority Power Management, a Midland-based consulting services firm that helps clients manage their energy supplies.” There have been no additions to the generation mix in the Electric Reliability Council of Texas’ grid.”
In addition to declining reserves, energy watchers recognize that summer,  the period of Texas’ greatest energy usage, is right around the corner. Speculators look toward summer weather patterns to determine energy demand forecasts. Even a small fluctuation in average temperatures can change energy needs dramatically.

“A few degrees on average can have a huge impact on energy use. Summertime is the big mystery,” said Ruthven.
Industry experts in Texas are pondering how reduced production, a shrinking buffer, a narrow energy source, and higher, but unpredictable, summer usage will impact the grid in the coming months.

Turn Shifting Markets into Opportunities for Lower Hospital Power Costs

Hospital leaders should position their facilities to endure these potentially seismic shifts in the Texas energy market.

“It’s a good time for hospitals to review their energy contracts,” says Jeremiah Bastian, senior account executive with Priority Power. “Prices are volatile right now in the short term, but long-term rates are very attractive, so it makes sense to be looking forward as far out as hospitals are comfortable.”

“For our hospital, energy costs are no small part of our overall spending each month. Having a highly informed strategy for our energy contracts helped us realize savings that we in turn were able to redirect to other needs within the hospital,”

said Stephen Bowerman, the chief financial officer of Midland Memorial Hospital, whose team worked with Priority Power to help reduce the hospital’s energy costs.

Bastian says that many of the hospitals BOWERMAN Priority Power works with purchased long-term contracts in 2016, which, it turns out, was “one of the two lowest points of the market in 20 years.” But for those that didn’t, now’s the time to review contracts, he said.

Even though energy prices have been unusually low for several years, that is likely to change, said Bastian. “We might see more coal plants closing, which will squeeze the market even more.”

Additionally, said Bastian, “There can be as much as a five-times difference in terms price savings fluctuation when buying gas at one time of year versus another.”

Generally, said Bastian, hospitals can often demand better-than-average energy pricing because of the nature of their operations.

“In general, hospitals are a coveted (power customer) due to high load factor,” said Bastian. “That means that because their electricity use is heavy and consistent, hospitals can demand and negotiate lower rates than some other entities can get.”

But that doesn’t mean hospitals should sit back and relax when it comes to energy acquisition. It’s important that health organizations, for whom energy is a major expense, work with an expert consultant who not only sources the best pricing but understands how timing and risk tolerance factor into energy contracts.

“We certainly saw the benefit of adjusting our approach with our energy providers,” said Bowerman. “Whether it was knowledge of the market that helped us adjust the length of a contract or even when we asked for bids, we have confidence that we can control costs despite Texas’ volatile energy market.”

Priority Power has been an endorsed partner with the Texas Hospital Association since 2008. Call or email Perry Ruthven.

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