Auditel utilities news update: 24/04/2020
This report provides a snapshot of useful information for customers in relation to the impact of Coronavirus on energy and other utility supplies. Many customers will be wrestling with the consequences of the current restrictions, battling to keep their businesses solvent when incomes are floundering yet outputs are still being demanded. Energy and utilities are key areas of concern and this report is designed to help you overcome these difficulties.
Energy Pricing Update
The energy market continues to flounder as most global commodities, particularly oil struggle in the wake of falling demand. Oil prices have hit an historic low as output exceeds the capability for it to be stored.
However, despite oversupply and falling demand, prices have recovered a little from the lows of last month. Although many energy suppliers are restricting their activities to shorter term contracts and tightening credit restrictions, now remains a good time to fix prices for the future.
In the last edition, we provided guidance on how customers could prepare for the impact of the coronavirus epidemic on their business. In this edition, we focus more on the impact it has had on utility suppliers and how this in turn may impact customers.
Why falling prices and demand are bad news for suppliers
When customer demand falls, suppliers are left with a surplus of energy which they have to sell back to the market. This is fine when the market price is higher than they originally bought it for, but if it is lower they make a loss.
In this example, any energy sold back to the market would cost the supplier £17 per MWh
Consequence: suppliers may start to apply take or pay / volume tolerance clauses.
Why falling demand could lead to higher non-energy costs
Whilst domestic consumption has increased, this has been outweighed by falling business usage.
Some elements of our price are based on a fixed cost recovered from all the units of demand, therefore if usage falls, the cost per unit increases. This could see a whole range of non-energy costs increasing in 2020/21 and beyond.
Consequence: The impact is uncertain but analysis suggests that if demand falls by 30% for a period of 9 months this could be as much as a 6% increase in the cost to the customer. This could cause suppliers to open up contracts claiming force-majeure to recover these costs.
Currently estimates put demand down by about 13% for the same time last year, with figures of 29% being suggested as possible.
Whilst suppliers’ terms may allow them to increase prices under these circumstances, they will have to think carefully about doing this because:
- The adverse PR effect of charging more at such a sensitive time will not be popular
- The Government would frown on such actions
- Many suppliers may not have the capability to undertake such price changes
- Charging more may simply increase their debt profile if customers simply cannot pay anyway
There may also be scope for the Government to intervene, particularly with regards the recovery of non-energy costs. This could mean that some suppliers may fail if they cannot finance their obligations as their income falls.
There will be particular pressure on specialist B2B suppliers who do not have a broader portfolio of business interests such as renewable energy generation to help support their supply business interests.
Whatever happens, Auditel are keeping a close eye on developments and will seek to advise customers if such scenarios play out. So if you have any questions about this, please do not hesitate to contact us.