How to Manage Your Energy, Literally....
Jon Sholter
Today in less than 5 minutes we are going to cover: Managing your energy costs
Enjoy this? Sign up for our newsletter here :) #hotelmanagement #EnergyManagementForHotels
I thought about doing a deep dive into natural gas and electricity invoices for hoteliers today, but then realized no one would read past this first line.
Instead of doing a deep dive, I am simply going to give perspective on how you might want to view energy price contracts in the future. I want to speak to operators in regions where you are responsible for locking in natural gas and/or electricity at certain prices and lengths of time.
Before I go on, why listen to me? Well because almost every time I have locked in prices in energy, I've made the wrong decision. Wait, didn't I mean make the right decision? No, I meant what I said.
Usually when I give energy price speculation advice I simply tell people to do the opposite of me, kind of like the advice most of us should give when we give stock tips to our close friends and families. Perhaps this is no different, so again I am offering perspective, not an action.
OK, so what do I have to Say?
Think of energy prices like you think of your home mortgage, except way more volatile. What does this mean? Well, how many of us would love to have locked in our 2.25% interest rate mortgage for the long term? If you didn't, when you think back, why didn't you?
For many, we were so use to low rates we thought they would stay low forever. Alternatively, some thought they could save a bit more. No better satisfaction than when someone tells you they have a 2.25% mortgage and you tell them you have a 1.75%! But in reality, this is only a 0.5% difference.
We have now been re-exposed to the idea that interest rates can go a lot higher. So in the past, if we stayed variable, maybe we could save 0.5% to 1.0%, but now instead of saving 0.5% to 1.0% we risk losing more like 4.0 + percent.
Let's talk about some general implications of this when looking at electricity prices pre covid and post covid. There were many years where electricity would hover around $0.03 - $0.05 cents a kilowatt hour (KWH) pre covid. For us who did not lock in a decent price during this time, we thought well what if prices come in at $0.025- $0.035? For a hotel averaging 80,000 KWH per month, instead of paying $38,400 annually we could pay $24,000 for this electricity, a $14,400 savings. Not bad.
However, in the past few years we have seen these prices go from $0.03-$0.05 to up as high as $0.27 on some months and averaging around $0.17 per kilowatt. Meaning that same property is paying $163,200 on variable. An additional cost of $124,800 annually. Not Good.
What does this mean?
When you see low rates in the future, maybe don't be afraid to lock in a decent portion of your energy. Worst case scenario you give up a little profit, but the upside really outweighs the downside in this situation. Put another way, prices can only go so low, but the price increase potential is theoretically unlimited.
There's a lot more to energy usage than what is mentioned above and I would talk more about it if it got the clicks. For those that want more knowledge in this area, feel free to reach out. Remember, nothing I mentioned above is advice and you can always trust that you will never be totally right in this game.
Remember, hindsight is 20/20, but when prices get near too good to be true, it's time to take some risk off the table.