High Energy Costs - The DRR. is In!

If you are like me, you are considering some possible alternatives or other ideas when it comes to managing the increasing costs of energy. Gas and oil prices are through the roof and this, we’re told, has an impact on all energy costs.

The real-life example is happening now for me with the household electric bill up almost 100% over last month. This increase includes a higher-than-normal temperature for the Air Conditioning (definitely the highest cost). For me, last year, the AC was typically set to 70 degrees. This year, 74 degrees is the norm. But the higher temperatures do not seem to have helped the situation.

The big question becomes, especially in light of the heatwave, what has driven the cost of energy and electricity up so high? In the short run, there has been a heatwave over a few weeks so far this summer and demand for energy is way up in light of the consumption of Air Conditioning. Enter the DRR. The DRR I refer to here is the concept of Diminishing Rate of Returns (DRR).

According to a recent NPR report, as energy companies have to produce larger amounts of energy, more and more fuel must be consumed in order to eek out additional energy. Of course, in some cases, there are artificial ceilings on energy costs imposed by government. Whether you think this is a good idea is another discussion. But in my case, this has not kept the electric bill down.

There are a few possible reasons for this:
1. Artificial Ceilings on electricity may not be in effect in my area.
2. Prices may not have risen to such a level that they would come into play.

Either way, it is important to recognize that as we hit peaks for energy usage, the price is naturally going to spike. This is because we have a relatively inelastic demand for electricity. There are very few reasonable short-term, good substitutes for Air Conditioning and Hot Water and other major consumers of power during the Summer months. Therefore, the Diminishing Rate of Returns is important to recognize because what it means is that for the electric companies overall, these small adjustments are great, but only if everyone is doing them.

Plan for the Short Term

With prices spiking as they do during the summer, there’s a few ideas that might help you prepare and weather the rest of these hot days.

1. When budgeting for your Electricity Costs, expect a 75%-100% increase in electricity costs over your winter Electric bill if you run Air Conditioning. This will give you a good baseline to start budgeting from.

2. Keep that AC a little higher than you are used to. Just a couple of degrees can make a difference because during the moderate days, the AC will run less and save more money.

3. Use Fans when possible. Fans can circulate the air to make Air Conditioning more effective and cost only pennies per hour to operate.

4. Skip the AC all together on moderate days; this might be mildly uncomfortable, but by using fans, you might be able to save significant sums.

Long Term Vision

Overall, it is important to keep our eyes on energy, not just during heat waves, but during the slower times as well. As america grows and China’s insatiable appetite for energy grows, it will eventually surpass our own. And you can bet that there are likely not going to be significant increases in supply in the near term to combat that increased demand.

Therefore, expect energy prices to go up. And expect them to go up even more if there are significant events which reduce supply (like the alaskan oil field shutdown earlier this week or a real supply-impacting crisis in the middle east). If you do not have some of your investments into some type of energy stock or mutual fund, it might be worth considering it. It is unlikely that our demand will decrease faster than china’s demand increases. And supplies are unlikely to increase significantly either. Having some investments in these types of stocks (especially if you buy them at the right time) might soften the blow as we see gas prices rise over 3.50 per gallon.