The US Industrial Complex Is Starting to Buckle From High Power Costs

Surging bills are forcing companies to scale back industrial operations, threatening a greater drag on the economy.

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Molten aluminum at Century Aluminum’s mill in Hawesville. Photographer: Bryan Woolston/Reuters

Europe’s fertilizer plants, steel mills, and chemical manufacturers were the first to succumb. Massive paper mills, soybean processors, and electronics factories in Asia went dark.

Now soaring natural gas and electricity prices are starting to hit the US industrial complex.

On June 22, 600 workers at the second-largest aluminum mill in America, accounting for 20% of US supply, learned they were losing their jobs because the plant couldn’t afford an electricity tab that tripled in a matter of months. Century Aluminum Co. says it’ll idle the Hawesville, Kentucky, mill for as long as a year, taking out the biggest of its three US sites. A shutdown like this can take a month as workers carefully swirl the molten metal into storage so it doesn’t solidify in pipes and vessels and turn the entire facility into a useless brick. Restarting takes another six to nine months. For this reason, owners don’t halt operations unless they’ve exhausted all other options.

It’s the most poignant signal yet of what’s to come—but not the only one.

At least two steel mills have begun suspending some operations to cut energy costs, according to one industry executive, who asked not to be identified because the information isn’t public. In May, a group of factories across the US Midwest warned federal energy regulators that some were on the verge of closing for the summer or longer because of what they described as “unjust and unreasonable” electricity costs. They asked to be wholly absolved of some power fees—a request that, if granted, would be unprecedented.

It’s no wonder. By the beginning of June, natural gas prices had tripled what they were a year earlier, threatening households and businesses alike with some of the biggest utility bills they’ve ever seen. This summer, electricity rates for industrial customers are set to hit their highest levels ever, based on US government forecasts. Because US plants and factories depend on both electricity and gas, this could very well be the moment the rug pulled out from under American industry.

US Average Industrial Electricity Price

Manufacturing overtime hours have already declined for three straight months, the longest downward stretch since 2015, and a measure of US manufacturing activity weakened in June to a two-year low as new orders contracted. A week after Century’s announcement, the nation’s largest aluminum producer Alcoa Corp. said it’s closing a third of its production at a mill in Indiana because of “operational challenges.”

These headwinds could eventually threaten what some see as a longer-term boom in US manufacturing as corporations look to reduce their dependence on China. Executives are highlighting plans to relocate production at a greater clip this year than they even did in the first six months of the pandemic, but energy and labor costs will pose challenges for any company looking to build a new operation in the US.

Manufacturing isn’t the bellwether of the US economy it once was. The plants that 70 years ago employed more than a third of the nation’s labor force now account for about 8% of nonfarm workers. An industrial downturn on its own won’t tip us into a recession, but it could if combined with weakness in other sectors. While the might of American industry has significantly weakened over the years, it still accounts for more than a tenth of US gross domestic product—and for that reason holds an outsize place in the hearts of politicians whose factory visits are a perennial staple of campaigns.

US Manufacturing Jobs

Plants will try to operate more efficiently to lower their utility bills, but there are limits to how much they can save. In a lot of regions, industrial users aren’t just paying for the power they use; they’re also paying for what’s known as capacity, essentially an insurance policy that keeps enough power on the grid for the most extreme of demand days. (Think hot summer days when everyone’s air conditioners are blasting.) And with wholesale energy prices near the highest levels since 2008 and aging power plants shutting, those insurance premiums are growing exponentially, particularly in the middle of the country where much of the country’s industrial operations lie.

One potential bright spot, or an indication of how desperate industrial companies are becoming: Some are partnering with startups to explore alternative energy sources: Nature Energy says it expects to start building facilities this year to collect and convert cow dung and crop waste into renewable natural gas. Power Edison, which is proposing to stack massive batteries on barges that can be shipped around to customers in need, is attracting more attention.

As Katie Coleman, an attorney for Texas Association of Manufacturers, puts it, her members have three big cost drivers: taxes, electricity, and labor. Those three vary in proportion over time, she says, “but right now, electricity is an even larger factor than normal.” Some companies with multiple factories are trying to decide which plants to keep running this summer based on how cheap they can get their electricity, she says, and some may decide which to permanently close. Such is the case for Century, which will keep operations running in Iceland where power is incredibly cheap because of local renewable energy resources.

There is a lot to blame for this year’s surge in US energy prices: Russia’s invasion of Ukraine; the ensuing surge in US natural gas exports to markets overseas; extreme weather brought on by climate change; aging fossil-fuel-fired power plants retiring at a record pace. They’re all coinciding with a sharp rebound in post-pandemic demand.

One group of manufacturers will say they told us so. The Industrial Energy Consumers of America has been calling on the Biden administration for months to limit the amount of gas US energy suppliers send overseas, warning that exports would eventually lead to supply shortages at home. But a measure like that would set a dangerous precedent and threaten the billions of dollars of investments in liquefied natural gas terminals along US shores. Shipments overseas have so far remained unfettered.

How severe of an industrial downturn we’re heading into depends on a lot of variables—chief among them being how long energy prices remain high. Milder weather, fewer power plant disruptions, and more solar and wind farm deployments could shift the natural gas market back into an era of lower prices and improve the fortunes of manufacturers. Today, we are far from that.

Michael Harris, whose firm Unified Energy Services LLC buys fuel for industrial clients, says costs have risen so high that some are having to put millions of dollars of credit on the line to secure power and gas contracts. “That can be devastating for a corporation,’’ he says. “I don’t see any scenario, absent explosions at US LNG facilities’’ that trap supplies at home, in which gas prices are headed lower in the long term.

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