Despite forecasts that average wholesale energy costs will steadily decline over the next decade, the impacts of the ‘energy trilemma’ mean that businesses are facing greater price risk and the prospect of rising bills.
How can organisations counter such a threat whilst also taking advantage of the opportunities that price risk presents?
Price risk – security of supply
Lowering gas costs, stable carbon prices, and the falling rates to import these energy resources to Britain are the rationale behind favourable predictions for wholesale power costs in the coming years.
However, with wholesale prices notoriously hard to forecast beyond the short term given the numerous factors that drive supply and demand fundamentals, the market remains as volatile as ever.
Owing to the UK’s reliance on energy imports (gas in particular), British energy consumers are especially vulnerable to this volatility, as what we end up paying depends heavily on the value of sterling – a factor left far from certain following the 2016 EU Referendum result.
The country’s exposure to this price risk was laid bare at the end of 2017, when an explosion at the Central European Gas Hub and a technical fault on the Netherlands-UK pipeline sent gas prices hurtling skywards. The majority of British energy consumers had no choice but to swallow the cost.
Meanwhile, with Centrica having announced the closure of the country’s largest gas storage facility, Britain’s vulnerability to such unforeseen events is only set to be exasperated.
Market volatility and Britain’s energy security issues are not the only ways in which UK consumers are being left exposed to price risk, however...
Price risk – the cost of decarbonisation
Over the past decade, growing societal pressures to secure a cleaner, greener and more sustainable supply of energy has seen the UK government introduce a raft of new energy subsidy elements (such as the Climate Change Levy) aimed at promoting low carbon generation.
These policy costs, which also ensure that generation is sufficiently flexible to address the intermittent and unpredictable nature of the growing level of renewable technologies on the grid, are set to account for the largest increase in electricity prices over the coming decade.
At the same time, network charges (the cost of delivering energy), will also see a significant rise as new investment is needed to replace old assets and to connect new renewables (offshore wind, for example).
Such is the combined impact of these non-commodity charges on energy bills that between 2017 and 2027:
electricity costs are forecast to increase (in nominal terms) by 55 per cent*
gas costs are forecast to increase (in nominal terms) by 21 per cent*
* Retail Electricity and Gas Forecasts 2017-2027
Importantly for industrial and commercial (I&C) consumers, these price rises are no longer a far off financial risk, but very much happening now.
2017 saw non-commodity costs make up more than half of the average I&C energy bill, with this set to increase to approximately two thirds of the bill by 2020.
Meanwhile, we predict that total power prices could rise by as much as 20 per cent in 2018 alone, depending on a company’s site and energy consumption profile.
In spite of this, many businesses are still all too complacent when it comes to non-commodity costs. This finding was reflected by a recent Energyst survey which found that almost half of firms had failed to budget for the new Capacity Market charge (appearing on energy bills for the first time in winter 2017/18, adding an estimated £380m to UK business bills).
Reduce your price risk - Be #energyconfident
Despite the forecast for a steady decline in wholesale energy prices over the next decade, and with the commodity element of energy bills actually shrinking in proportion, it has conversely never been more important to buy energy smartly.
Market volatility – which Britain remains particularly vulnerable to amidst uncertainty surrounding Brexit and dependence on gas imports – shows no sign of changing during 2018 and beyond, meaning large business energy consumers will continue to face increasing degrees of price risk.
As a result of the unpredictable environment, without a deep understanding of the constantly moving market, it’s become increasingly difficult for large British businesses to be completely sure of their energy purchasing strategy.
At SMS Plc, we help you identify, understand and comprehensively reduce your price risk, helping make your business energy confident.
By tracking and analysing markets in real time, we identify opportunities and threats, using our market intelligence to advise on energy purchasing and procurement strategies and deliver your business the best-priced power.
Gone are the days, however, when buying energy as smartly as possible is solely enough to shield yourself from risk.
With the multiplication of non-commodity costs (brought on by legislation such as DCP 161 and DCP 228), procurement today accounts for just one part of a well-rounded risk management plan.
While we can optimise your contractual situation to safeguard against any potential negative cost impacts, the need today for businesses to understand their energy consumption better presents the greatest potential to turn risk into opportunity.
Offering the complete energy management service, we allow for an integrated approach to risk management across procurement, billing and consumption – enabling your business to achieve maximum savings across the whole spectrum of your energy spend.
What’s more, we can help you introduce greater flexibility – be it through self-generation, battery storage or demand response – meaning you not only save, but potentially monetise your energy use.
To us, that is what #energyconfident organisations look like.
We know we can make you #energyconfident, why should you be confident in us?
We come with the trust and stability of a PLC with national and international coverage
We uniquely work with both energy suppliers and directly with leading blue chip customers.
We support and advise regional, national and EU government across a range of industry innovations
We continually invest in both the development of our people and our processes through the deployment of the latest technologies
The complete range of services we provide are delivered via our own in-house teams, completely differentiating us from anyone else in the market.
Contact us today to discuss how we can help your organisation reduce its price risk. Call us on 02920 739 540 or email us and we'll get back to you!