The price you pay for your energy is determined by a number of factors but if there is one factor that has been driving energy prices more than any other over the past 18 months it is the coronavirus pandemic. Covid-19 has changed the way many of us live and work, causing energy demand to drop dramatically and energy prices to rise and fall in response to local lockdown measures.
Now that we are beginning to return to some sort of normality, many businesses are wondering how the ongoing impact of the pandemic will impact their energy bills in the future. Nick Campbell, Director of Energy Intensive Clients at Inspired Energy, offers his thoughts on what is been happening in the market and how businesses can prepare for future price changes.
Impact so far
Entering 2020 an excess of Liquefied Natural Gas meant the market was bearish and, despite growing concerns around Covid-19, the market remained fairly stable for some months. It was not until the UK’s first lockdown measures were brought into force in March 2020 that we began to see the huge effect the pandemic would have on energy prices. With many businesses across the globe forced to close and business energy use falling dramatically, energy prices dropped substantially.
When it became clear that lockdown measures would remain in place for much longer than many originally predicted, and that a global recession was likely to be imminent, demand forecasts were adjusted downwards and both prompt and future prices were lowered. It was not until winter 2020-21, when hopes of returning to normality were restored by the emergence of several vaccines, that prices began to rise again. Prices increased further as most major economies announced large stimulus packages for businesses which boosted hopes that demand would soon return to normal levels.
This trend continued into 2021 with future-dated contracts for gas and power rising particularly sharply. The carbon market had as much influence on these price increases as Covid-19 did. However, as carbon prices rose to record levels, the EU carbon price hit €50 per tonne for the first time in May 2021. As more countries set ambitious carbon emissions reduction targets, carbon permits are becoming increasingly expensive and this cost is being passed on to customers through higher carbon prices.
In the coming months, we can expect to see continued volatility when it comes to wholesale energy prices. As we gradually return to a form of normality, the Bank of England has predicted that UK GDP will rise by 7.25% in 2021 and there are hopes that we can avoid a third wave of Covid-19 in the UK as the mass vaccination programme continues. This means that prices are steadily rising for far-dated contracts. However, global markets are still wary about the pandemic, with major stock indices (which many see as a barometer for demand) making limited gains in 2021, curbing upside risk to the energy complex going forward.
When it comes to carbon prices, there is still a great deal of short-term uncertainty as the UK’s Emissions Trading Scheme (ETS) is still in its early stages. Appetite for UK carbon permits is still uncertain which means that we could see the carbon price fall. In the long term, however, with the UK set to host COP 26 in November and our new target of reducing emissions by 78% by 2035, we can expect to see carbon prices continue to rise over the coming years. This will push up wholesale costs for businesses.
How can businesses prepare?
With wholesale energy prices set to remain volatile for the foreseeable future, it can be difficult to determine how to best prepare your business for every eventuality. Here are some recommendations:
1. Review your current contract
No matter how long you have left on your current energy contract, take the time to review your agreement now and consider how different contract options could help to protect your business from ongoing energy price volatility. You may want to adjust your volume tolerance, for example, if your business is planning to implement flexible working policies for the long term. Take our procurement challenge to find out how you could optimise your procurement strategy for the future.
2. Don’t forget about non-commodity costs
Non-commodity costs (NCCs) now account for over half of your energy bill which means you must consider how NCCs might affect your future budget too. If your business has successfully implemented Triad avoidance strategies (i.e. reducing the power you draw from the transmission system over winter in order to avoid the three highest peaks on which transmission charges are retrospectively based), for example, you should already be preparing for the end of Triads in April 2023. Ofgem is working to introduce the Targeted Charging Review (TCR) which changes the way residual costs are recovered by replacing the consumption-based charge with a simple, fixed charge. Find out more on how to prepare for TCR here.
3. Seek expert advice
Buying energy is easier when you have insider insight into the market so ask for specialist support to ensure your business is taking the best approach to energy procurement.
For further details on the matters raised, contact Wayne Brown, Head of Strategic Partnerships at Inspired Energy at firstname.lastname@example.org
By Inspired Energy plc