Electricity is a traded commodity with a Futures Market, exactly like oil, tea and pork bellies. The wholesale electricity price is driven by analysts’ perceptions of the relationship between supply (how much is readily available and at what cost) and demand (how much is required now and in the future).
The wholesale electricity price is one of the most volatile commodity indices today:
- It doubled between January 2003 and December 2005
- Between 17th and 22nd November 2005 it increased by 16%
- Fluctuations within a day are frequently as much as 2% to 5%
- It is much more volatile than stocks and shares on the FTSE.
Analysts’ perceptions are based on their analysis of many factors that influence supply and demand. These factors include:
Changes to prices of related commodities such as oil, gas and uranium The US Energy Information Administration (EIA) has a great Website that tracks Electricity Prices and the drivers that are pushing them upwards. It is important to note that 80% of the electricity produced in the world is it from three fuels: coal, natural gas and uranium. Between the start of 2000 and the end of 2006, largely due to the increased demand from India and China, the cost of both uranium and natural gas multiplied by 7, whilst coal almost doubled in price.
Short and long term local weather forecasts Baseline electricity consumption is driven by a number of factors and one of the most significant is the local temperature. High temperatures impact air conditioning and refrigeration usage, whilst low temperatures drive heating usage upwards. During a weekday usage fluctuates wildly with peaks occurring at 16:30 when children come home from School, during commercial breaks in televised sporting events and popular television programs etc..
The impact of international events such as natural disasters and International politics. We live in challenging and uncertain times. This means the relationship between these factors changes frequently, which in turn leads to volatility in the wholesale price of electricity. So on a daily basis prices can rise and fall by a considerable amount. Every serious analyst is predicting continuous increases in the price of Electricity into the future.
Reducing the energy consumption of our data centers is a commercial imperative as energy costs are becoming the overriding factor influencing the Total Cost of Ownership of IT equipment.