In this guest blog by Noah Andrle of Nationwide Utilities, he explains what is happening in the energy markets and advises as to the options available.
What is going on with the UK gas and electricity markets?
Everyone will have heard something about UK wholesale electricity and gas prices reaching unprecedented levels. In the last 12 months, wholesale costs have increased by 250% and in the last 6 months, by more than 200%. On 22nd July this year, at a Be Richmond networking event, I made a presentation about the energy markets, and urged anyone with energy contract renewals to secure, not to leave it too long. Since that day, UK wholesale prices have risen by 80%, leaving business energy users with October contract renewals, facing typical energy cost increases of up to 80%. Safe to say that customers who need to sign a new contract before 1 October 2021 are asking: “why are prices so high?”, “what is going to happen next?” and “what are my options?”.
Why are prices so high?
During Apr/May-20, electricity and gas wholesale prices crashed to 13-year lows due to suppressed global energy demand caused by Covid-19 lockdowns.
Since then, wholesale prices have risen significantly, driven by:
- Colder winter temperatures across the UK and Europe during the first half of the year boosting heating.
- Hot temperatures over the late Summer months taking Europe to the other extreme of increased air condition demand.
- Increased demand from greater business activity as lockdown restriction are loosened.
- Carbon pricing rising to an all-time highs.
- Prices are being supported by high levels of tender activity in the run up to the 1 Oct renewal date. Q3 is usually the busiest in the industry, meaning any clients who haven’t yet secured their new contracts will all be asking suppliers for prices at the same time, supporting high prices.Just when you thought the market drivers pushing energy prices upwards couldn’t get any worse, along comes an interconnector fire to knock out 1-2GW (potentially around 7%) of the UK’s energy supply. – National Grid says the blaze – which occurred in the early hours of Wednesday morning at the convertor station in Kent where the IFA 2000MW power cable brings in electricity from France – will reduce capacity by about 50% until March next year.
Energy Wholesale Markets Outlook
With prices so high it’s easy to think that it’s only a matter of time before they drop. However, the reality is that prices are more likely to rise further.
- The end of lockdown restrictions means business activity in the UK and Europe is growing, boosting energy demand.
- European gas in storage is extremely low for this time of year. When combined with unplanned outages to gas pipelines, nuclear plants and a lack of LNG deliveries, we’re likely to enter the upcoming winter with serious speculation about whether we have sufficient gas to last the winter.
- During the current summer months, gas demand is relatively low. But this will likely increase as we enter winter months, temperatures drop and heating demand rises.
- Lastly, since energy prices are already high huge numbers of clients have held off from locking in their contracts. But with 1 Oct just round the corner (this is the most common renewal date in the energy industry) many businesses are now going to be forced to lock their energy contracts in, otherwise they will be going out of contract. This increased tender activity boosted demand resulting in higher prices.
So, in the short to medium term, high prices are here to stay so if your renewal is coming up soon, it’s probably a good idea to get it locked away before prices go even higher.
However, once we get half-way through the winter period, if there hasn’t been any major supply disruption, we could see prices start to fall. But we don’t expect this to happen in any significant way until it’s too late for customers with 2021 renewals.
At some point in early 2022 we fully expect prices to drop significantly from the current highs. So clients with late 2022 renewals may be able to benefit from slightly lower prices next summer.
Options and Recommendations
With prices having risen so high, it’s difficult for clients to know what they should be doing with their energy contract renewals. Here are a few recommendations.
1 Oct 2021 and 1 January 2022 Renewals
- NU recommends locking in your contracts urgently. Do not wait.
- With temperatures getting colder and lots of businesses still to renew, we could see even higher prices.
- It is unlikely prices will fall significantly as we go into the cold winter period.
|Do nothing – go onto “out of contract rates”||You can sign a contract when/if the market falls||
You’ll being paying 25+p/kWh for electricity and 5+p/kWh for gas. This option is not recommended
|“short” 6-month fixed price contract||You can sign a contract in February or March. If we have a mild winter the market should have fallen by then||The cost will »15% more than a 12-month contract|
|12-month fixed price contract||You can sign another contract in summer 2022, the market should be more favourable unless this coming winter (21/22) is very challenging||You have to absorb a significant price increase|
|“long” 24 month or 36-month fixed price contract||The cost will » 5% to 10% less than a 12-month electricity contract and for gas the saving is 10% to 20%||You are buying “year 2” and “year 3” at lower prices than “year 1” but the absolute prices are still relatively high|
|Flexible contract (for larger customers)||You can stagger your purchases and wait until later before buying 2022||In the first six months the cost will be »15% more than a 12-month contract|
About the Author: Noah Andrle
Noah is Nationwide Utilities’ Commercial Director. His 20 years of energy sector experience began at npower in 2002, where he managed the I&C Technical Services team, before joining The Energy Desk in 2011. He joined Beond Group in 2014 as a Senior Consultant, before moving to Nationwide Utilities in February 2021.
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