Navigating a Volatile Energy Market
By Mark Rose, Sales & Marketing Director
Welcome to the first in a series of posts on some of the most pressing issues in the energy industry today. This month, I’ll look back at the last six months in the energy industry and some of the elements for business customers to think about when navigating a complex and dynamic market.
Since I joined the energy industry in 2004 there have been numerous challenges in the market. In 2008 we experienced rapid increases in prices and then the subsequent collapse in wholesale prices on the back of the credit crunch. This saw huge customer price increases (30%+) and the collapse of some small B2B suppliers.
In 2013 we saw the height of the political and media focus on the energy industry, resulting in price reductions being negotiated with government through the deferral of environmental and social costs. This was rapidly followed by the competitor and markets authority (CMA) review and the implementation of a domestic price cap by Theresa May.
The Covid pandemic has caused significant problems both for suppliers through massive reductions in demand for gas and power, and for many business energy customers who need to pay their bills during a time of reduced income.
But nothing I have experienced has been anything like as turbulent as the last six months. The spiraling cost of energy has dominated the news, alongside the number of suppliers failing - with more than 24 (albeit largely in the residential sector) going out of business since September 2021. Soaring wholesale prices obviously bring challenges for customers, and failing suppliers also means outstanding costs have to be shared by the rest of the industry, which can further impact bills.
The increasing wholesale energy prices are largely being driven by four key factors – a lack of storage, low wind generation output, JKM (Japan Korea Marker benchmark LNG prices) and restricted Russian gas flows. For a deeper insight into these, you can see our 2021 market update here. There is now more market uncertainty with recent events in Ukraine.
It is not only the price increases but the extraordinary fluctuations and volatility that have been causing issues in the industry. In June 2021 gas prices were under 70p per therm, but they soon began to rise – spiking in September at over 270p. They continued to rise,
reaching a high of more than 450p in December, with prices still well above those from a similar period last year.
The electricity market has been similarly volatile. In June 2021 prices were under £100 per MWh, but by September had reached over £500 - with another spike to £400 in December. The word ‘unprecedented’ is perhaps overused, but is entirely accurate in this case – I remember in 2008 when prices were over £80 per MWH that we were in difficult times …little did we know.
It is worth reflecting on the impact this has had on businesses. Due to the rising and volatile wholesale prices, and the steady increase in non-commodity costs exacerbated by the industry cost of supplier failures, the cost of energy has become an ever more important factor to consider when budgeting and managing overheads.
Elements to consider when navigating the market
Unless you are tied into a fixed deal agreed before the recent rises in wholesale prices or have hedged well ahead of time, you will already have felt some financial impact - and if you haven’t yet, you can expect to in the future unless prices dramatically fall again, and no-one has a crystal ball.
Therefore, in the current market environment it is important to consider the following elements before deciding what type of product and approach to take:
- How important is certainty of costs?
- How much risk are you willing to take in terms of movements in the market?
The costs that you pay broadly split into two different types and there are different options available based on your approach to these questions:
Commodity cost (wholesale electricity & gas costs) options
- Fixed - This means that your cost of electricity/gas will be fixed for the duration of the contract. This is the best option for budget certainty but it won’t benefit you if the market falls.
- Flexible –Enables you to leave some or all of your consumption to current market rates, as well as purchase tranches of your expected consumption in advance. This leaves you more open to set your own strategy and utilise your expertise in the market.
Non commodity cost (industry and environmental charges) options
- Fixed - This means that your non-commodity costs are fixed for the duration of your contract term, providing the most budget certainty.
- Fixed annual - This means that your non-commodity costs will be fixed for 12 months and reset for each year of the contract, providing some budget certainty but also meaning your rates will more closely align to current market charges.
- Pass-through - This means that you will be charged the non-commodity costs as they are at that point in time, so they will change when the published industry rates change. This is the best way to know that what you are paying is fully reflective of the costs that suppliers are incurring.
Fixing both the commodity and the non-commodity element provides a fully fixed unit rate and standing charge, although the final invoice you pay will depend on your consumption - which has been unpredictable for some businesses over the last couple of years. There is then the choice on how long to fix for. A longer-term deal will protect from any significant market movements for longer, but you won’t benefit if prices fall. A flexible deal offers the ability to benefit from market movements, with the flexibility to set your own purchasing strategy if you do want to purchase a proportion in advance.
Every business is different, so there is no right or wrong answer when choosing a product and product length, but at TotalEnergies Gas & Power we are happy to discuss the choices available and the pros and cons of each.
The increases in wholesale prices mean that it’s time to look at reducing energy consumption wherever possible. There are a number of simple energy efficiency steps that businesses can take if they haven’t done so already. The Carbon Trust’s ‘Better business guide to energy saving’ (link to https://www.carbontrust.com/resources/better-business-guide-to-energy-sa...) is a useful read.
There are also a number of tools available in the market that can help businesses with multiple sites to identify which ones are operating efficiently and recommend solutions for the ones that aren’t.
Looking at the business case for on-site generation such as solar would also be sensible, as if prices remain high the payback could look more favourable than it did only months ago. This
would not only result in saved energy costs but also the potential to sell some of this power back to the grid.
Thanks for reading, and remember, our team are always on hand to support you – just visit https://business.totalenergies.uk/
Please note that any opinions here are my own, and not official positions of TotalEnergies Gas & Power.