The price is right

Controlling continuous energy market changes. By Richard Nicholls

Despite efficiency improvements and new technologies, energy markets remain unpredictable and are not getting any easier to navigate. This was highlighted over the last winter when gas prices were sent skyward by multiple cold spells and operational interruptions. This kind of activity has a serious impact on gas costs, with knock-on effects on businesses. Many UK consumers re-contracting in the current market will be facing material price rises that impact their bottom line.

The gas shortages of last winter led to multiple price spikes as successive cold spells caused UK temperatures to plummet sending consumers’ boilers into overdrive. The notion of higher demand during the winter period is far from a new phenomenon and is in fact one of the most reliably predictable features of the entire energy industry, however various other factors led this severe winter to affect prices above and beyond what is normally expected.

Firstly, seasonal gas storage is becoming decreasingly economical, as illustrated by Centrica’s decision to close the Rough gas storage site last year. This has led to the reduction of readily available supply and compounded the increased demand of businesses and households already feeling the winter chill, leaving the UK less able to cope with sustained cold periods and more susceptible to price spikes due to increased volatility. In addition, energy markets are becoming increasingly interconnected and it’s impossible to look at markets in isolation. Last winter we saw cold spells not only across the UK, but wider Europe. As an island nation on the geographical fringe of Europe, the UK is more exposed to some of these price shocks than our continental peers.

The record cold spell seen at the end of February and start of March was well reported at the time, however the effects are still being felt by both suppliers and customers. Gas storage levels across Europe remain well below seasonal norms, and the current efforts to rebuild reserves have led to sustained high prices. The question remains whether the events seen in the last winter are an outlier, or whether they are more reflective of a new pattern that we can expect to recur in future years.

These issues are essential to both domestic and business users. Speaking on the behalf of the latter, suppliers should be addressing these issues by communicating to and working with their clients, alongside building new strategies and products to help ensure customers can access the most cost-effective gas supply opportunities.

Active management
In volatile markets, timing becomes more important than it would otherwise be in sideways or more stationary markets. It’s important that suppliers can work with customers to help them understand what is driving price changes and how this impacts the prices consumers are paying at the meter. Customers can ensure more certainty over energy costings by looking at renewals further in advance and engaging with both suppliers and the best-in-class third party intermediaries.

Larger consumers may opt to take more direct control of their energy supply by entering into flexible contracts whereby the fixing of wholesale market price risk is transferred from supplier to customer. These contracts give users the ability to better manage their energy and enhance performance by implementing effective trading strategies. The decision to switch to a flex contract should not be taken lightly, as businesses taking trading responsibility are susceptible to market risks that could cause gas prices to unexpectedly change. If these risks are not actively managed the benefits of a flex contract could vanish and businesses could be left with large bills. The efficacy of this strategy relies on either dedicated management from within flex-contract businesses, or the maintenance of a structured dialogue between suppliers and clients. Brook Green Supply’s strategy for maintaining this dialogue is to provide on hand consulting from its dedicated account managers, which advise businesses on current market conditions and forecasts to help them minimise their energy costs.

Gas prices should not be viewed in isolation, however, as these have a large influence on other energy costs. A high proportion of the UK’s electricity is produced from natural gas power stations, and so the market issues affecting gas are likely to have a knockon impact for other parts of the energy industry. The importance of active gas price management, therefore, cannot be overstated.

Suppliers are dealing with the energy markets daily and must work closely with businesses to ensure that energy price changes are communicated as effectively as possible and optimised to reduce consumer costs. Through expert knowledge of the factors affecting gas prices, and how these are likely to change, suppliers can manage prices and work with customers to provide tailored products and advice to maintain cost effective supply.

Brook Green Supply
Richard Nicholls is Director at Brook Green Supply, a UK-based electricity and gas supplier providing commercial and industrial businesses with the best possible energy supply contracts. The company is committed to simplifying the market and changing the status quo by ensuring clear quotes, honest prices, accurate invoices and a pro-active support team to meet customer needs.

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