Energy Cost Woes Will Worsen With War

by Alexander Wissel, Executive Editor

War, by its very nature, is uncertain… and inflationary. Over the past week prices for crude oil have bounced around as war in the Middle East grips the region. The Strait of Hormuz – which many people have learned about recently –  channels roughly 20 percent of the world’s crude oil trade and sits at Iran’s doorstep. 

More than likely this conflict will not be settled quickly, and the global disruptions to supply chains and energy costs will get even worse before they get better. Which is unfortunate, because energy costs are already a big problem for residents and retailers in the Northeast. 

We’ve talked with a number of retailers across our readership who have told us a similar story. The snowstorms and below freezing temperatures that affected us for weeks have put a real hurt on budgets. The full impact of these energy costs are still being tallied – but the consensus is that it’s going to hurt.  

When we started digging into the numbers, we were surprised to learn that the Northeast has some of the highest costs for energy in the country. Only Hawaii, Alaska and California pay more than we do – not exactly great company to be in from a cost standpoint. 

It comes down to fossil fuels. While our region represents only 3 percent of the national generation capacity, we represent 20 percent of the country’s petroleu

m-fired capacity. When oil prices go up, our energy costs do too. And so do the shipping and transportation costs for those diesel trucks as well…

In the deregulated Northeast market we have a heavy reliance on natural gas, an older electrical grid, and we are more constrained by access and geography versus national markets.

The states of Delaware and Connecticut were the only Northeastern outliers who saw their business power rates go down. The rest of the states in our coverage area saw increases of 9.5 percent on the low end in Rhode Island; to the top where Maryland, Virginia, and Pennsylvania saw increases of 17.3 percent, 15.2 percent, and 18.1 percent respectively. 

Commercial power costs across much of the Northeast are rising year-over-year at a pace that exceeds the national average of 7.8 percent.

So Why Do We Pay More For Energy?

It’s worth noting that most of our region is deregulated and customers are free to shop for power providers, although that power is delivered by the legacy utility. Deregulation historically has been pitched as a pro-competition and pro-consumer choice, but in most cases it’s been shown to ultimately increase costs.

The only regulated state in the Northeast, Vermont, saw its rates climb by just 5.7 percent over the past year. 

The issue for the Northeast is a power generation problem as much as a political one. After almost 20 years of stable and steadily growing demand, our region is running out of power. Put another way, we aren’t building enough to keep up with current growth trends. 

Some of the blame is being p

laced on the independent system operator: PJM Interconnection. That independent regional transmission operator controls a large swath of the Northeast power market: from Indiana and Ohio to the west, south to Tennessee and Virginia, and north to Pennsylvania and New Jersey.  

The organization has drawn the 

ire of the regional governors for being too slow to increase power generation amidst exploding demand. Now it’s drawing more attention. At a bipartisan January event, President Trump focused his efforts on the region’s power woes with an initiative he hopes will bring $15 billion in new generation online. 

In a rare bit of cross-aisle cooperation, he was joined by Maryland Governor Wes Moore and Pennsylvania Governor Josh Shapiro. The joint goal of increasing the power generation capacity and lowering prices in the region was shared by both of these 2028 pote

ntial presidential candidates. 

It’s also a preview that affordability will be a story well into the next two election cycles. 

One of the other reasons we are seeing increased power costs in the states of Maryland, Pennsylvania, and Virginia is that we are home to the largest concentration of new data centers in the country, being brought online largely to power AI. The insatiable demand for power to run these AI systems is stripping away our excess capacity and leaving retailers and consumers alike to shoulder the costs. 

Northern Virginia – a short 45-minute drive south from our office – is home to more than 600 data centers. Sitting just outside D.C., those facilities account for a whopping 25 percent of the data center capacity for the entire country. The 4,000 megawatts of power that these servers consume would be enough to power 3 to 4 million homes. 

Here’s another sobering reality: even if the political powers that be approve new power plants, it will take years before many of them will be online. Excessive utility bills aren’t something any of us want to look forward to for the next few years. 

What Can You Do Now?

We’ve been shown that the largest grocery operators manage their energy exposure through complex hedging strategies and long-term power agreements. Energy swaps, derivatives, futures contracts, and virtual power purchase agreements are increasingly common tools. Their scale allows them to employ specialists and analysts dedicated to forecasting and managing these costs.

Some of these strategies can be adopted by smaller operators that have a clear understanding of their energy consumption. Others may be unworkably complex for most independent grocers. However, for operators located in our deregulated energy states, there may be a more practical option.

As we mentioned, in deregulated markets the delivery and generation sides of the electric grid are separated. That means a grocer can choose an alternative energy supplier while continuing to receive service through the local utility that owns the transmission infrastructure connected to the store.

The potential savings can be meaningful. For example, when reviewing our own residential energy bill, the rate through the default provider was nearly $0.19 per kWh. Alternative suppliers in the same market were offering rates closer to a third of that. 

The numbers will vary by market and contract structure, but the opportunity is worth evaluating if you haven’t already done so.

Is Energy Conservation Back Again?

Is it time to revisit energy conservation programs? Earlier this year, an article on foodtradenews.com looked at how many energy-saving initiatives have moved beyond simple public relations exercises. ESG – environmental, social, and governance – is the framework to measure sustainability, impact and risk management. What once looked like window dressing or “greenwashing” is increasingly translating into legitimate cost savings for operators.

Given the current volatility in energy markets, it would not be surprising to see grocers reevaluate many of their environmental programs with an eye towards finding additional savings.

Solar is another area worth reconsidering. I’ve watched two neighbors add solar systems this year – installed within a day or so. Larger commercial-scale solar generation can range between roughly $0.06 and $0.08 per kWh today. Now solar will never replace a supermarket’s full energy demand, but even partial generation can materially lower blended electricity costs. 

At the right price point, the economics become difficult to ignore.

While it would be nice to view solar strictly through the lens of sustainability or public relations, the more immediate driver for most operators will be economics. At some point the return-on-investment calculation becomes compelling. And right now every cost lever matters.

Coming At You From All Sides

Grocers are operating in a difficult environment. We’re hearing from multiple sources that consumers are pulling back spending across categories, and demand is softer than many expected.

Whether driven by food inflation, tariffs, higher residential energy bills, local economic uncertainty, or even the emerging impact of GLP-1 drugs on consumption patterns, the result is similar. The ongoing trend continues to accelerate: shoppers are spreading their trips across more stores and purchasing fewer items per visit. Spending is more deliberate and tactical. 

Labor pressures remain another major challenge. The Federal Bureau of Labor Statistics reported that total payroll employment declined by 92,000 in February, while the unemployment rate held at 4.4 percent.

Most employers would welcome some relief on labor costs, but a softer job market has not translated into significantly lower wage pressure. Higher minimum wages and ongoing merit increases continue to push effective labor costs upward.

It’s already a challenging period and we have yet to see the full impact of the growing geopolitical crisis in the Middle East. As I stated earlier, war is inflationary. Through energy the costs for almost everything is affected. Persistent inflation – which is still inching higher – looks to be an ongoing problem. It could also mean less flexibility for the Federal Reserve to cut interest rates later this year. 

If it feels like a lot of pressure, it probably is. But remember that both pot roasts and diamonds can be made in a similar way – with a pressure cooker.