2014 Energy Market, ‘Flat and Flatter’ and the value of 3 Year Deals
With all the recent brouhaha regarding Energy over the back half of 2013, we thought it would be worth giving our thoughts as we go into 2014 on the energy market in general and some of our reasoning.
Regardless of what the perception is, the market is flat. It’s flat now, and it’s been flat for a while. Today’s pricing is almost exactly the same as this time last year. The difference between the commercial market (which energy companies buy at AND sell to businesses at) and the domestic market is what causes the confusion here. We sit at home watching our bills go up and the news telling us about price increase after price increase, but, not to labour a point, the wholesale market is flat. In fact 5 of the Big 6 have announced price decreases for domestic tariffs in the past month but you’ve not seen that on the front pages have you! The press are as much to blame for perception of increases.
The domestic market lags behind the commercial market for many reasons, which we’ve written about in the past.
As it stands, long term deals seem to be more productive at the moment, which, again, regardless of perception, is unusual (but not unheard of). Energy companies have to build in a lot of uncertainty into long term contracts. Usually, the gut feel is you have tended to pay in the region of a 10% premium for this. Historically, this has not been far away from what we have experienced over the years. Currently, however, we are often finding that the cheapest annualised contract price is actually the 3 year deal, the graph below is a genuine client’s tender results:
So, what could be causing these oddities and the pricing anomaly?
- The Pressure? There’s no doubt (and little coincidence) that the furore started by Mr Miliband in August (and now carried through by almost everyone within 50 miles of the Commons) had the respective PR machines at the Big 6 pushing the overdrive button. However, this long term pricing strategy seems far more considered and reasoned than just a good old fashioned knee jerk. Have Ed’s claims to control the energy markets borne fruit, purely by stimulating the market forces he derided in the first place?
- Shale Gas? Very soon, and for the first time in a LONG time, the USA will be a net exporter (in around 2 years) of energy and British Gas have already begun to purchase future supplies from them in anticipation. Is the Middle East’s stranglehold on pricing coming to a close?
- ‘Green’ tariffs going into general taxation? Much has been made of this in the recent press, with the energy companies themselves coming out in support of the exchequer funding the UK’s clean energy drive. Is this just ‘story swapping’ as the ‘Price Freeze’ tub-thumping runs its course?
There are also many other factors at play here, but the general message is that all of the aforementioned point to energy suppliers themselves feeling the market will stay flat or actually trend down over the next 3 or 4 years, barring any major disasters and/or conflicts. This may, or equally may not, be borne out, but that is the gamble energy companies take with this pricing strategy.
All this speculation could lead you into thinking you might be better off leaving this to the experts… I’d certainly agree with you there!
Lee Freeman is an Overhead Management Specialist at Auditel Leeds and is open to the idea of 3 year energy deals at the moment.