Businesses that have needed to sign energy supply contracts in the last few weeks will have been shocked by the increases that they have seen in the renewal quotes compared to their existing rates. It is always our aim to save our client’s money on their energy supply but sometimes it is just not possible.
So what is making our prices rise when for the last 18 months we have seen an almost consistent reduction in prices?
There is one simple answer to that and every economics student will know it well – demand and supply. Where supply outweighs demand prices are inclined to come down, where demand outweighs supply they will go up. Nothing very revolutionary in that piece of information.
The last six weeks has seen some events that have had a major impact on both gas and electricity prices. Mostly they are issues that have affect supply rather than demand. That said demand spikes haven’t helped.
Taking a look back over the last few weeks of movements in the gas and electricity markets several things have affected prices:
- Oil prices
- The weather
- The value of the £
- Supply outages
The Organization of Petroleum Exporting Countries (OPEC) have agreed to reduce production. The exact figures won’t be known until November but it is likely that the reduction will help to ease the global oversupply that currently exists. This creates upward pressure to prices.
The weather has varied, we had much warmer weather than expected at the beginning of September which drove people to put their cooling systems on this coincided with a sudden drop in wind generation (in fact next to no wind generation). This created an imbalance between demand and supply. Exacerbating the imbalance was the occurrence of a number of outages at gas and nuclear power plants and a limited outage on the connector that links us to France. During the week commencing the 12th of September day ahead wholesale electricity prices surged to end the week 10% higher than they had started. Last week (17/10-21/10/2016) saw another large increase in day-ahead prices caused by safety outages in France’s nuclear portfolio and hence reduce imports from the interconnector plus cooler temperatures.
The value of the pound against the dollar directly affects the cost to the UK since oil is traded in dollars. Whilst we don’t use oil to generate power in the UK, the price is often reflected in the price of gas which we do use. The close connection between the two traded commodities means that when prices increase for oil, or the pound is weak and therefore the price would be higher if trades were made in £s rather than dollars, then there is upward pressure on both gas and electricity on our wholesale markets.
Carbon emissions, which are traded in Euros will suffer from a similar effect where the pound reduces in value against the Euro. In addition, increased carbon trading costs to British operators may apply indirect pressure on both gas and electricity prices, gas being a cleaner commodity than coal and therefore less costly in carbon terms. It may create an increase in gas demand forcing the price up and creating an increase in the cost of electricity production.
Finally, as we have already seen supply outages can impact prices enormously. This is the very essence of a demand/supply relationship. Where there are hints of scarcity at a time of increased demand the price will always increase.
All of this will make a difference to the prices you are offered when you try to negotiate your renewal contract. If you want to stay well informed about the markets you can visit our website or you can refer to the market reports that are published here periodically. We have a number of Energy Consultants who are able to advise you about your particular circumstance and when you should or shouldn’t go out to market. If you wish to receive a copy of our weekly market report please do not hesitate to get in touch and we will be only too happy to oblige.