Utility Costs Are Quietly Eating Into Small Business Margins as Wholesale Prices Stay Elevated

For most small business owners, energy sits in a budget line that gets reviewed once a year and ignored the rest of the time. That habit has become expensive. Wholesale electricity prices in the United States averaged roughly 5.5 cents per kilowatt-hour in 2020. By 2023, the U.S. Energy Information Administration put the commercial sector's average retail rate at 12.69 cents per kilowatt-hour, a figure that bakes in transmission, distribution, and utility margin on top of whatever the wholesale market is doing. The gap between what operators budgeted 18 months ago and what they are actually paying now is measurable in percentage points of net margin.

Natural gas is telling a similar story, with more volatility. Henry Hub spot prices swung from below $3 per million British thermal units in early 2020 to a peak above $8 in mid-2022, and have since retreated, but the retreat has not fully unwound the cost structures that utilities locked in during the high period. Rate cases filed with state public utility commissions tend to lag market moves, which means commercial customers are still absorbing increases that were approved 12 to 18 months ago even as the underlying commodity softens. For more on the topic discussed above, see National News Desk.

Where the Pressure Shows Up First

Restaurants, laundries, light manufacturers, and any tenant operating in older commercial real estate with inefficient HVAC are carrying the heaviest load. The National Restaurant Association reported in its 2023 State of the Restaurant Industry report that energy costs had become one of the top three uncontrollable cost pressures cited by operators, alongside food and labor. That is a meaningful shift from five years ago, when energy rarely made that list.

The mechanics are straightforward. A quick-service restaurant running commercial refrigeration, ventilation, and cooking equipment for 14 hours a day is consuming electricity at a rate where a 20 percent increase in the per-kilowatt-hour charge translates directly to several hundred dollars a month in a midsize market. Over a 12-month operating cycle, that is money that is not available for staffing, maintenance, or debt service.

Landlords in triple-net lease structures have been partly insulated because tenants bear utility costs directly, but operators in gross-lease arrangements are renegotiating with more urgency than they were two years ago. Some commercial property managers are reporting that energy cost disclosures have become a standard ask during lease renewal conversations in a way they were not before.

What Operators Can Actually Do

The practical options are not glamorous. Enrolling in demand-response programs offered by regional utilities can reduce peak-hour charges, which make up a disproportionate share of commercial electric bills. The PJM Interconnection, which manages the grid across 13 states and the District of Columbia, runs demand-response programs that pay commercial customers to curtail load during high-demand periods. Operators who have not audited their rate schedule with their utility in the past two years are likely on a tariff class that no longer reflects their usage pattern, and reclassification requests are free to file. Energy procurement contracts, available through brokers in deregulated states, allow operators to fix a rate for 12 to 36 months, which at current price levels may be worth the commitment cost.