Why the market is more favourable for longer term contracts

The type of energy deal you have for your business can make a huge difference for your bottom line.

For example, opting for a fixed term contract can at times protect your business from overpaying for energy if the market then rises.

However, as things stand in the UK energy market, the most effective way to reduce your energy spend is to fix your business energy contract beyond a 12-month period.

Why is it better to fix your business energy contract beyond a 12-month period?

Russian supply

Currently on the market, energy prices for delivery in 2023, 2024 and 2025 have been rising week-on-week. This is because the European market is anticipating zero Russian supply in the coming years. Irrespective of whether this happens, the sentiment is driving higher prices on the market.

Winter storage

The winter period will begin in a couple of months in the UK. If storage sites are not at regulated levels all across Europe, then prices will rise further. This is because the market always anticipates tighter supplies during the winter season.

Colder winter

A colder winter in 2022 could see reserves deplete across the UK and Europe. This in turn would affect the energy prices in 2023, as supply will be tighter than usual.

Global gas supply

Global gas supply is expected to remain tight, with higher gas demand from Asia, particularly from China, as it accelerates its economic growth. This will reduce gas supply for Europe and the UK, and will have a direct impact on LNG flows to these respective destinations.

Russia/Ukraine crisis

Uncertainty remains over the Russian invasion of Ukraine. European sanctions against Russian gas, or any retaliation from Russia against the western sanctions imposed upon it, will lead to higher and volatile prices.

Supply shock

The current tightness in supply in the market leaves it vulnerable to supply shocks. Any new unforeseen event may exacerbate the current tightness in the market. For instance, the recent fire at the Freeport LNG terminal led to higher prices in European energy markets.

Global price rises

High energy prices are not currently isolated to the UK or Europe. The influences on the markets are also not UK or European specific. The US and Asian energy prices are currently following a similar price trend to the UK and Europe.

French nuclear reactors

A significant number of nuclear generators are currently unavailable in France. The UK electricity price is being impacted because of this lower supply. French power prices are significantly higher than the UK, so the UK is exporting electricity to France to take advantage of the price premium. However, this adds to the tightness in the current generation mix.

Outlook

As things stand, the UK gas and power price curve remains in backwardation. This means that energy prices remain cheaper further out on the curve. Procuring energy further out on the curve, will lower your unit rate. A longer term energy deal will secure the cheapest prices according to today’s market.

If you have any further questions about the energy market or business energy contracts, contact Northern Gas and Power on +44 (0)3 300 300 800 or email our trading desk via: trading@ngpltd.co.uk

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