BY: CHRIS BARRETT
Since our last report, we have seen incredible volatility again in the energy markets.
Just before Christmas continued anxiety about the shortage of gas in storage and the impact of the curtailment of Russian gas saw markets rocketing, exacerbated by a loss of trading liquidity due to the approach of Christmas. Fortunately, since then then a glut of LNG released by the US to help shore up the European storage levels has allowed prices to fall back again, albeit levels remain very high and vulnerable to a reversal.
LOOKING FORWARD THE KEY FACTORS REMAIN
On the upside – European gas storage levels which are very low, the evolving political crisis between Russia and Europe and the US and increased demand from Asia, cold weather spells. On the downside – a resolution to the Ukraine problems which in turn could see the return of gas flows from Russia and the completion of Nordstream2 and the continued flow of LNG.
OPTIONS FOR CUSTOMERS WITH CONTRACTS IN 2022
Whilst the current prices may have a lot of sentiment still built in, most observers seem to believe prices will remain high for some time to come. Chris O’Shea the CEO of Centrica believes that demand for gas will continue to be high as globally we reduce coal fire generation, then the current situation could remain in force for a couple of years.
a. When to Buy
One of the first challenges is to decide when to buy. If your contract end date is imminent then you have little choice. However, if your contracts are not due for some time, there can be merit in entering a contract some time in advance to take advantage of lower prices in the future. The graph below shows how the electricity price forward curve reduces over time. Of course, there is no guarantee that these prices will fall further in the future.
The options for customers to try to mitigate these high prices fall into two categories
1. Purchasing strategy. Comprising of:
a. When to buy
b. How long to buy for
c. Type of product to buy
2. Reducing your exposure to the market by using less
b. How long to buy
This is also affected by the view of forward prices. Because forward prices are falling, then a longer-term contract will generally be cheaper than a short- term contract. The decision logic is therefore the same. If you think prices might fall further in the future, then it does not make sense to enter a long term contract. However, if you think they may go up, then it does.
c. Type of product
For most customers a fixed price product is normal. This locks in the prices for a period of time giving pricing certainty. However, there are many other types of product available which could give a pricing advantage.
ci. Pass through
This allow certain elements of the energy prices most commonly the infrastructure and taxers and levies costs to be charged at the published rate. In a normal fixed product these are fixed, but because the supplier may not know what they will be in the future they build in a premium to cover their risk. So pass through prices are usually cheaper at least to start with. However, this does mean that prices are likely to change over time and they may also increase.
cii. Flex contracts
These allow you to break your energy usage into blocks so that you can buy different amounts at different times. This works well if you are in a falling market and do not want to lock in at a high price. This tends to favour larger customers with enough energy to create a strong purchasing strategy. However, smaller businesses can enter so called ‘flex baskets’ with other customers to take advantage of an aggregated purchasing strategy.
ciii. Direct contracts with energy generators
Some generators will enter into direct contracts with customers for their energy. As a customer you still need to have a supply contract to ensure you pay your non energy costs, but it may be possible to enter into a preferential contract with a generator direct. However, this is a fairly sophisticated contract with higher initial set up costs and usually requires a long-term commitment on behalf of the customer as well as the need for the customer to have long term reliable demand.
REDUCING YOUR EXPOSURE TO THE MARKET BY USING LESS
Of course, the holy grail for us all and the planet is to simply use less. Whilst high prices are of course bad news for businesses, they do improve the business case for energy savings initiatives. Also, as reported in previous editions, there is growing pressure on all businesses to demonstrate responsibility to the environment by lowering carbon emissions. Most businesses by now will probably be aware of the main options open to them:
1. Onsite energy generation Solar PV / Biomass generation / wind turbines.
Many businesses will have the option to consider these and with financing readily available and cheap, the financial returns can be very beneficial.
2. Energy reduction technology
The most obvious of these is LED lighting, which many businesses have already addressed, though new generation LED might bring further savings and improved lighting quality. However, the carbon revolution is spawning a whole new generation of technologies to help businesses reduce usage.
Whatever your activity, it is likely that there is a technology that will work for you. Whether you are interested in the best way to buy energy or to save energy, Auditel can provide help and advice.