I have written down my thoughts on the current state of the energy market to help clients in their decision making. The reality is that the world’s leading analysts do not have these answers; however, I hope that the comments below provide some guidance to help customers decide when to secure their energy contracts.
- SMEs have been forgotten in the media
- Prices could still increase significantly in the coming months, so find out where you stand now, for the future!
- Understand your terms and conditions
- Consider long-term contracts to help with short-term cash flow
The question on everyone’s lips—those who run small businesses up to the UK’s largest production facilities—is, of course, contract/buy now, or do we wait?
My expectation is for prices to remain high, but my concern for customers is that the media’s main focus is on the immediate energy prices and the increases in the domestic energy price cap, which could put blinkers on the reality of cost increases that businesses could face. With 99% of UK businesses (and 60% of employment) encompassed within the SME sector, it’s critical that these customers receive the support and education to make informed decisions.
Businesses must remember that they are not covered by the domestic cap, and that the current proposed plan from the government to support the domestic market is simply a loan plan to help customers’ short-term finances (it will be recovered in later years). With this in mind, support for the commercial sector is highly unlikely.
Like many industry parties prior to Christmas, businesses are hoping that the European conflict will be resolved, and prices will fall. While they could reduce slightly, there is also a real risk that they can increase exponentially to new record highs.
If tensions with Russia ease, question marks still remain over if and when Russia will increase non-contracted gas flows to Europe, or if they will continue to withhold gas to put pressure on the approval of the Nord-Stream 2 pipeline to Germany.
So, should businesses be shopping around?
Unlike the domestic sector (which is currently uncompetitive due to the price cap), there is value in businesses shopping around for prices. While some suppliers have reduced their activity in the market, others who have positioned themselves well are using this as an opportunity to onboard new customers.
Now is the time for businesses to plan for future costs
Most importantly, businesses need to understand what their future costs will be now. While you can choose not to enter a new contract yet, I absolutely advise businesses to find out now what their future prices will be based on today. Energy contracts can be secured up to two years in advance, and while it’s unlikely that you will find savings, securing a contract now might prevent your business from further increases.
Read the fine print
The last port of call when negotiating your contracts is to clearly understand the terms and conditions of your chosen product. Energy suppliers have had (and will continue to have) a difficult time over the coming months. As a result, several suppliers have amended their products and associated terms and conditions. In many cases, what look to be the most cost-effective products allow suppliers to pass through additional or unforeseen charges. I am not saying this to show energy suppliers in a bad light—it is simply a reality that, even for them, some of the charges that make up a customer’s energy contract are difficult to predict.
Here are some of the main market fundamentals that impact drive price change in the energy markets:
Geopolitics: Russia/Ukraine conflict
One of the key drivers of energy prices at the moment is the limited amount of gas being delivered from Russia into Europe, compared to what they are capable of delivering. This is unlikely to change until (and if) Nord Stream 2 is approved to ship gas into Germany.
Forecast supply and demand
Since the closure of Rough, a gas storage facility, the UK has no gas storage capacity, and is thus reliant on European storage levels—which are at record low levels. On average, 40% of the UK’s electricity is still being generated from gas, which means that electricity prices will continue to be driven by the gas crisis.
Traditionally, European storage gas is filled in the summer and withdrawn from winter. With the lack of gas being imported from Russia and expectations that it won’t be imported during summer this year, this means that prices will continue to increase significantly for the next few years.
It’s clear now that the move to decarbonise the UK (whilst essential for our environment) has progressed too quickly, leaving the UK short of baseload (continuous) generation to support demand when the renewable solar and wind assets aren’t producing.
Additional industry charges – SOLR
Outside of wholesale prices, the failure of 28 energy suppliers in 2022 has left a debt to the industry, which could reach £2 billion of unpaid industry charges. This value will be mutualised over the remaining energy suppliers, who will pass this cost through to end users where they have the opportunity.
What is holding prices from increasing further currently?
Several major energy users reduced production as it makes no commercial sense to produce goods at the current prices. This also has downstream impacts on supply chains by reducing their productivity.
Consult an energy expert
Now, more than ever, it’s advisable to seek the services of an energy consultant to help you time your switch, understand the terms and conditions and access the best possible energy deals.