The headline might seem like an obvious one – you’ve most likely seen your energy bills go up over the last several years. But it’s not just families struggling to pay high electric bills. Hoosier companies, particularly those that are energy intensive (such as manufacturing facilities), face exponentially-higher sticker shock when it comes to paying the electricity bill.
And the consequences of companies paying more for electricity is far-reaching: less money for employees, higher prices for consumers, fewer opportunities to expand and lost economic development chances.
Here’s a little history: In the early 2000s, Indiana was fifth lowest in the country, in terms of electricity prices. Today, the state has fallen to the middle of the pack, around 27th lowest.
The State Utility Forecasting Group (SUFG) out of Purdue University puts together electricity forecasts every two years. The current forecast (released at the end of 2013) points to prices increasing by over 30% over the next 20 years, with electricity demand in Indiana staying almost stagnant.
We look at the reasons for the higher prices and the lower demand in the new edition of BizVoice®. I spoke with the director of the SUFG, as well as the president of a small foundry in Rochester and a representative from the Indiana Industrial Energy Consumers, Inc. (which represents some of the state’s largest industrial energy users) for their reactions to the SUFG report.
While I didn’t have the opportunity to include an email interview with Wayne Harman, manager of energy procurement from ArcelorMittal USA, I’m able to share some of it here. Here’s a shortened Q&A:
BizVoice®: What is the consequence of high electricity prices for a large energy-intensive company like ArcelorMittal USA?
Harman: “Higher electricity costs translates to net higher costs for manufacturing finished steel products. Added costs cause inflationary pressure when they can be passed on to customers or squeeze profit margins when a commodity’s market selling price is too low to fully cover the added manufacturing costs. Business investment tends to be reduced until a later period when profit margins are stronger.”
BV: When determining where to build new plants (nationally or abroad), how much of a factor are electricity prices?
Harman: “The cost of power is a key factor in making such a decision, but also the availability and reliability of that power source need to be taken into consideration. Market demand and a company’s supply position to serve that market area need are more important in making such decisions … Above a certain cost point, electricity costs become a deal breaker for such investments.”
BV: Nationally, Indiana used to rank fifth lowest in electricity prices, now we’re somewhere around 27th lowest. What kind of an impact is that making when companies compare states to locate their new or expanding businesses?
Harman: “Clearly the higher cost of electricity in Indiana now as compared to just a few years ago is a disadvantage. Companies must also factor in projections for how the electricity costs will likely increase going forward as compared to other geographical regions, as there is a wide range for current power costs and power generation mix (nuclear, coal, natural gas, etc.) region to region. Indiana is heavily coal-fired generation and as such the costs to deal with tightened EPA emissions from these power plants has translated into higher power prices.”
BV: The SUFG released a recent forecast that predicted that prices will grow by over 30% over the next 20 years, while demand stays relatively flat. If companies have a hard time keeping up with costs now, what is the impact that an extra 30% will have over time?
Harman: “All companies are being forced to reduce the energy intensity of their businesses in order to offset what they can of the future electricity cost increases. Any cost increases that cannot be passed on through higher selling prices cause profit margin compression and reduce the financial health of a company. Companies are sensitive to customer demands that they must first do everything in their power to avoid any increases in costs before they try to seek cost recovery through price increases. …
Since 2006, ArcelorMittal USA has reduced energy costs by more than $163 million through focused improvements and energy management, making us the only steelmaker to be named an Energy Star® partner by the US EPA and participant in the US Department of Energy’s Better Plants Program.”
Read the full story.