Rising Energy Costs: How Energy Trading Mitigates Gas Price Spikes
The recent breakdown of talks between the UK government and Centrica over the expansion of the country’s largest gas storage site, the Rough gas storage facility, has raised concerns about the UK’s vulnerability to gas shortages and high energy prices in the upcoming winter.
With the site operating at only a fifth of its previous capacity, experts and MPs have warned that the UK’s dependence on expensive liquified natural gas (LNG) imports will increase, leading to higher energy bills and supply risks.
According to Professor Dieter Helm of Oxford University, gas storage is an important aspect of security of supply and a public good, but the market won’t deliver on its own.
He stated that the UK’s failure to develop its gas storage with the necessary urgency is the reason behind the country’s vulnerability to high gas prices, despite importing very little from Russia.
In the absence of a deal with the government, Centrica has warned that it won’t be able to expand the capacity of the Rough storage site in time for next winter.
This leaves the UK dependent on LNG imports during the winter months, when prices tend to be higher and competition is greater, and exacerbates the lack of firm long-term contracts that would guarantee deliveries to UK terminals.
So, how can businesses mitigate the impact of gas shortages and price spikes?
One way for businesses to manage gas shortages and price spikes is through price risk management. One of the price risk management strategies used by NGP’s Energy Trading Team to offset potential losses and mitigate the risk of spikes is hedging.
Define: Hedging – What is a hedge?
To hedge, in finance, is to take an offsetting position in an asset or investment that reduces the price risk of an existing position. A hedge is therefore a trade that is made with the purpose of reducing the risk of adverse price movements in another asset. Normally, a hedge consists of taking the opposite position in a related security or in a derivative security based on the asset to be hedged.
At NGP, we utilise various hedging strategies depending on the market conditions.
Northern Gas and Power provide specialised energy consultancy that focuses on procurement of electricity and natural gas contracts for businesses and organisations.
NGP’s services help to relieve businesses of the administrative burden that comes with energy procurement and provides competitive prices for the procurement of electricity and natural gas.
In the energy market, price volatility and supply shortages are common occurrences that can impact businesses in various ways. However, energy traders bring expertise and market knowledge that can help businesses navigate price volatility, manage risks, and optimise their energy portfolios.
NGP is a valuable resource for businesses looking to mitigate the impact of gas shortages and price spikes. The consultancy has the ability to lock in gas prices, protecting businesses from price spikes and supply shortages. Additionally, we can source gas from multiple suppliers, reducing the risk of supply chain disruption.
The recent breakdown of talks over the expansion of the Rough storage site highlights the UK’s vulnerability to gas shortages and high energy prices during the winter months.
Energy trading through NGP can still ensure access to a secure and affordable energy supply. By working with NGP, businesses can effectively manage the challenges posed by price volatility and supply shortages while optimising their energy portfolios.
By Ramnikh Kular,
Senior Energy Trader, Northern Gas and Power