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Predicting Future Energy Prices – Part 1

By 9th May 2011February 15th, 2022No Comments

 

 

Posted by: David Powell

Agreeing an energy contract can be a tricky business. There are many different parts to an energy contract, but price per kWh is the one most people look at.

To agree a good price there are 2 seemingly simple questions – ‘when should I lock in and how long for?’ The ability to predict exactly what the energy market will do in the coming weeks and years just isn’t possible but by looking at the fundamentals that drive the market it is possible to agree contracts with an informed viewpoint and some degree of confidence. With this in mind Phil Bennett recently attended The Energy Show – an annual event at The National Motorcycle Museum in Birmingham dedicated to energy purchasing, metering and onsite generation. The below is his review of the event.

The event had some great speakers who offered a variety of view points on what was going to happen in the coming months and years. They discussed a multitude of factors that need to be considered when predicting the future of the energy market – factors that differ depending on whether you’re looking at the short, medium or long term view. Below I’ve given a quick overview of the main points I took from the event; some of the most important variables impacting UK energy prices today and into the future.

In the experts view there are 4 main influences on UK energy prices and a host of other factors and I’ll split these across a series of blog posts:

Part 1 – The Weather – see below

Part 2 – Gas Storage

Part 3- Shale Gas

Part 4- Electricity Market Reform

Part 5- Gl0bal Economy, Oil, Unrest, Nuclear, Earthquakes & Other factors

The Weather

Demand can fluctuate by as much as 80% dependent on the weather – hence it’s usually the most important short term influence on the energy market.

Traders rely heavily on forecasts when choosing their market position and react quickly as predictions and conditions change. A long period of stable conditions close to average temperatures keeps prices stable, extreme conditions produce extreme prices. Traders are said to get very jumpy when snow begins to fall around Canary Wharf!

As North Sea gas supplies decline, the UK is importing more energy from abroad with the knock on effect that our prices are increasingly influenced by weather conditions around the globe. An extreme example of this is the recent Tsunami tragedy in Japan and subsequent nuclear shutdown – resulting in the diversion of LNG cargos, pushing up prices in the short term. Similarly hurricanes in the US can put oil refineries out of action, pushing up oil prices and in turn gas. Although these two markets had decoupled in previous years, the recent jump in oil prices appears to have reaffirmed the link.

One other point to bear in mind with weather is that the further ahead the prediction, the less likely it is to be correct. Accuracy starts to deteriorate after 5 days and after 10 days predictions are rarely more than 50% accurate ie you could flip a coin and have the same success rate!

Latest predictions suggest below average temperatures in Southern England and above average temperatures in the rest of the UK through the summer months. If this is correct and there no major events impacting supply then energy prices should remain fairly stable through the coming year.

In the coming years predicted wind speed & direction is likely to play an increasingly important role in energy pricing as turbines come to form a larger % of the UK’s energy provision. Latest figures show that wind to the UK has dropped over the last 10 years, although whether this is a long term trend remains to be seen.