Today, in less than 5 minutes, we are going to cover the following: Managing your energy costs
I thought about deep diving 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 specific 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 tell people to do the opposite of me, 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 as 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 used to low rates we thought they would stay low forever. Alternatively, some thought they could save a bit more. There is 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 much 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 discuss some general implications of this when looking at electricity prices pre- covid and post covid. For many years, 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, averaging around $0.17 per kilowatt, which means 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. In the worst-case scenario, you give up a little profit, but the upside outweighs the downside. 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 who 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.