Options Available for Rising Energy Costs.

Only as far back as two years ago energy prices were relatively stable, depending on your budget, energy was not a major concern. Traditionally many businesses looked at it in August and signed for a 1 or 3 year deal. Back then wholesale prices for electricity were between 4-6p/kWh. A bad day seeing 7p/kWh for a few days. Recently as last summer prices reached over 100p/kWh for wholesale electricity costs.

How did this happen?

Energy prices did not just rise on the Russia/Ukraine crisis but we’re raising throughout 2021 due to structural issues in the UK, European and global energy markets. Lack of Storage has been a key driver, the loss of Rough storage in 2018 saw prices rise and has left the UK with more vulnerability to supply shortages compared to European nations. For the first time, Chinese demand for energy took away gas supply from Europe. Brazil’s drought also took away supply with their hydroelectric plants not able to be utilised. Additionally, the backlog of maintenance from 2020 reduced supplies further in 2021 causing strains on the system.  This weakness in the European energy market was seen by Russia and a prelude to the Ukrainian invasion.

Since the invasion prices have risen over five-fold. Last August prices reached a peak of 100p/kWh for electricity when Russian supplies to Germany ceased. A fire at a US export facility and the European heatwave causing draughts to have exacerbated structural issues for energy suppliers.

What options do I have for my energy contracts?

With this new level of volatility, which is now here to stay for the foreseeable future, consumers now have to adapt their energy purchasing strategy. No longer are fixed contracts viable as you would be stuck into higher prices for several years. Short term contracts hold significant premiums built in by the suppliers. The only alternative is to look at flexible contracts, this allows you to either be part of a basket of smaller consumers or on your own if the consumption of energy is high enough. This allows you to trade the market and pay market reflective rates. Many of you will have some exposure of currency and other commodities or raw materials that you have to purchase. Purchasing energy can now be done in a similar fashion, choosing to buy a percentage of your energy for certain months at a time, allowing you to build a position over time, rather than making one decision in a year or three years.

Is it too risky?

All commodities and trading have varied degrees of risk. However correct risk management strategies in place mitigate a lot of risk onan energy contract. At Northern Gas and Power, we insist on setting a budget as soon as the energy contract has been signed. This protects you from a rising market where all the energy could be purchased very quickly if the market has several bullish factors and very few, if any bearish factors. Secondly, a position report which allows you to see your entire portfolio is essential. This will tell you your forecasted consumption, what has been hedged and what remains open. It will also tell you what the cost of purchasing energy that has not yet been purchased is, or to buy the remaining volume of energy after several previous purchases.

The only alternative is to look at flexible contracts, this allows you to either be part of a basket of smaller consumers or on your own if the consumption of energy is high enough. This allows you to trade the market

When purchasing the energy, it should always be done in smaller ‘clips’ such as 10-20% of your demand at a time. This allows you to purchase energy at several points throughout the duration of the contract and you would pay a weighted average price of all those trades.

Buy building a position over time this allows you to take risk off the table and protect you from the next big spike in energy costs.

In a market that has seen extreme volatility from 100-14p/kWh in a matter of weeks, taking an average of all the trades done in between is the only way business can navigate these rising costs.

Senior leadership of CEOs and CFOs have never taken such a keen interest in energy, until now. Having the right systems in place makes managing such a contract far more easierto manage for finance teams. A monthly budget which automatically calculates your cost of energy gives them a peace of mind in how the contracts are managed.Lastly the correct market information, understanding all the key factors influencing the price of energy on the day, short and long term provides extra reassurance.

We are now in a global energy market, more interconnected than ever before. Consumers around the globe need to understand that as a nation relies on imports of energy, they are directly impacted by factors in other nations with the same demand for the energy as well as factors impacting the supply. For example, French nuclear generation impacts UK and European prices as France has traditionally been an exporter of that power to those nations. In 2022, prices rose as France became an importer of energy. Having access to the global supply and demand data flows of energy is now more critical than ever in navigating these volatile energy markets.