May 2022 Volume 4

OPERATIONS & MANAGEMENT

Procuring Energy in a Time of War and Volatility A Q&A with Paul Shagawat, Co-Founder and Managing Partner, Transparent Energy

Even before Russia’s invasion of Ukraine, Transparent Energy had been warning forging industry energy buyers of increased price volatility. What’s your take on energy markets today, factoring in the Ukraine situation? Global affairs have always played a strong role, often a dominant one, in energy markets, as we depended on foreign nations for the bulk of our oil and natural gas needs. That started to shift here in the U.S. during the natural gas boom brought on by fracking, which really flipped the script and recently turned the U.S. into the world’s largest LNG exporter.

That narrative though has changed – a lot. I remember in 2020, at the outset of the COVID-19 pandemic, urging large energy buyers to capitalize on historically-low energy prices, going out long to hedge against future uncertainty. That advice turned out to be spot on, because 2021 re-introduced extreme pricing volatility to the market. We’ve written a lot about why that happened, but for now let’s just say that as energy demand decreased during COVID and rig counts fell, natural gas also established itself as the fuel of choice (a cleaner-burning fossil fuel) as the world ramped up renewable energy projects. Global demand surged, but rig counts remained low, and prices started to spike. We strongly believe those really low lows of 2020 are a thing of the past. That can be a scary thought for the forging industry where energy costs are a major operating cost. High energy costs have a sneaky habit of creeping into all aspects of the economy, making it not only more expensive to heat and light your buildings and power your manufacturing facilities, but also increasing the cost of moving goods and people. How should companies approach procuring energy in this higher-priced, more volatile market? As scary as the pricing environment is today in energy, it still rewards level-headed thinking and a proactive approach. You have to go back more than a decade to 2008 to see monthly “settles” for natural gas this high. But just as we did back then, we have helped forging customers anticipate this pricing environment and hedge against it effectively. In terms of being proactive, we are helping many large energy buyers look years ahead where there is currently some opportunity in the market due to “backwardation,” i.e., a phenomenon where energy gets cheaper the farther out you go. This is about preparing them to act when it best suits their business needs. For those who take a proactive approach, when you buy power is something you can control, and that control almost always leads to a better handle on energy costs. I’ll be blunt here. During those good times when natural gas prices were low and getting lower, and volatility was stunted by warm winter weather and decreasing demand, large energy buyers could procure energy themselves or use a broker or a friend and likely save money compared to prior contracts. That’s not the case anymore.

Paul Shagawat, Co-Founder &Managaing Partner, Transparent Energy

As rig counts rose and natural gas supplies increased, natural-gas powered power plants grew in popularity, retiring high-polluting coal-powered plants, and drove down electricity costs. For many years, the forging industry enjoyed predictably low energy costs, with the biggest factor endangering those low prices being weather. For example, The Polar Vortex of 2014 and its aftermath rattled energy markets for more than a year, while last year’s deep freeze in Texas sent shockwaves throughout that market and beyond. But it didn’t only take extreme weather to move the market; back then, a week of hotter or colder weather than forecast constituted a volatility event.

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