Insight 15 September 2021

Energy prices: what a difference a year makes…

Twelve months ago the energy world and general economic outlook looked very different to what it does today. As we collectively attempt to recover from the impact of Covid-19, much of the picture is starting to appear more rosy. The economy looks more promising and most of us are learning to ‘live with the virus’. One thing hasn’t changed, though – as energy consumers we are exposed to a diverse and complicated set of conditions which have resulted in energy prices rising from historically very low levels to unprecedented highs.

Tight conditions in the power market this summer and fears of gas shortages in the cooler months ahead have resulted in wholesale market prices rising at an alarming rate. In September last year, Day Ahead electricity was trading in the £40 to £57 /MWh range. This month it has traded from £140 up to £540 /MWh. Last year, the winter gas contract traded between 37p and 40p /therm in September. This month it has traded from 128p up to 197p /therm.

For context, just a £1 /MWh change in forward prices can mean a 50 GWh annual electricity bill could increase by up to £50,000. The wholesale market forward price for next summer’s power has increased over £40 /MWh so far this year!

The energy market ‘Butterfly Effect’

This week, the International Energy Agency warned “it is becoming increasingly clear that weak investment, triggered by the pandemic and the uncertain path of future oil demand growth, is already impacting global supply”. Covid-19 has certainly had an impact on gas and power too, causing delays last year on the commissioning and investment in new energy supply projects, as well as mothballing production when US and European wholesale prices went negative or close to zero. The postponement of maintenance for existing supply infrastructure, such as the Norwegian gas system, has also reduced available supply today.  And resurgent demand for gas and power in 2021, after a dip of around 20% during last year’s lockdowns, has put an additional strain on energy balances.

The effects of a changing climate are also responsible for some of the tightness in the market this year. Anomalies in temperature across the globe has impacted energy supply and demand, with many of these regions competing directly with the UK for energy supply (usually by means of Liquefied Natural Gas). A colder than normal second quarter in the northern hemisphere saw gas inventories depleted to their lowest levels in many years – Europe is still recovering with gas storage stocks at a ten year low. At the end of June, North America’s most extreme heatwave saw temperatures in Portland, Oregon reach 46.6C, causing power shortages and soaring air-conditioning demand. Pakistan, northern India and parts of the Middle East also saw heatwaves, where temperatures surpassed 52C in places. Brazil’s worst drought in almost a century is threatening electricity supplies, pushing up energy and food costs in the country. And sub-normal wind conditions this year across North West Europe has meant more fossil fuels are being burnt to keep the lights on. Electricity from wind generation in the UK has at times been running below 20% of what would be expected for the time of year.

However, it could be said that policies put in place to prevent climate change by decarbonisation are also partially to blame for today’s record high wholesale energy prices. Investment in solar and wind power technology has been widely supported, especially by government policy, but the opposite has been true of investment in fossil fuel energy sources. This is the necessary direction of travel in order to reach a net zero end goal, but in the interim it exposes the electricity grid to periods of extreme tightness when the sun doesn’t shine and the wind doesn’t blow. Gas, and to a lesser extent coal, will still be required as a back-up for intermittent renewable generation for several years to come, which exposes the UK market to high import costs for these fossil fuels when they are scarce. Geo-politics has also been to blame for delays to the Nord Stream 2 pipeline bringing Russian gas to Germany, resulting in energy supply security being put at risk this winter (the opposite result from what was intended for this ‘political football’ of a project).

What can you do to protect your business against the economic impact of price hikes?

Your exposure to the price spikes gas and power markets are currently suffering may have been dampened by some well-timed forward hedges put in place last year. Or perhaps your consumption of wholesale electricity has been reduced through investing in your own generation (e.g. solar PV) or by securing a flat-priced Power Purchase Agreement (PPA). If that is the case, then you should sleep a little easier through the winter ahead where price spikes even more extreme than we are suffering right now could become the norm. If your protection and risk mitigation is limited to just this winter, then perhaps there is something you can do now to protect yourself and your business further.

Mitie Energy’s RMS service can advise on purchasing and execute contracts, helping you buy energy smarter. This could result in better timing when it comes to fixing prices. It might also mean you buy green gas or renewable power products to ensure your energy is low-carbon. And with a Power Purchase Agreement, PPA, you can purchase green energy directly from the source at a discount to the wholesale market. PPA’s offer businesses the ability to fix energy prices for 5 to 15 years which can protect your budget and reduce the exposure to volatile markets.

Investing in on-site renewable energy such as solar panels can give you more control over your electricity supply. We can help you with this. Carbon offsetting can reduce your carbon footprint with schemes such as tree planting. You can reduce your businesses energy usage by adopting energy optimization tactics such as ECM – Energy Conservation Measures, and BMS – Business Management Systems. Our account managers can undertake the analysis required to determine the opportunities for your business. Ask Mitie Energy about what new services we currently offer to support your energy management and procurement in the long term.

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