Rising Energy Costs: Important Information for your Business

Energy costs have soared to unprecedented levels. Forecasts suggest that price rises will continue into Q1 2022. What can your business do to protect your bottom line?

We have seen non-domestic energy soar to record prices per MWh, forcing businesses to lock in new energy contracts despite forecasts of further increases.

Businesses, whether they need to renew their business energy contracts soon or in coming years, can protect their budgets and bottom lines now by procuring more wisely, looking to adjust operations during off-peak periods, powering down equipment when it is not in use, and improving energy efficiency.

What’s happening in the energy market now?

The rising trend of non-domestic energy prices is driven by a number of global factors. The outlook ahead for the rest of the year and into the first quarter of 2022 suggests that these prices will continue to rise.

Day ahead power prices reached record highs of £285/MWh on 8 September and currently trade at a staggering £150/MWh.

Why are non-domestic power prices so high?

Rising global natural gas prices, diverged LNG shipments, inflation caused by Brexit and COVID-19, and low wind production have contributed to soaring non-domestic energy prices in recent weeks.

Gas prices in the UK are trading at above 140p/therm (4.78p/kWh). Additionally, depleted natural gas storage, reduced supply from Norway and fewer LNG cargoes in the UK have also driven up gas prices. With recent announcements that inflation is set to surge in Autumn due to the effects of Brexit and COVID-19, consumers are likely to be left out-of-pocket as prices continue to rise.

Energy demand is rebounding across the world as economies reopen and people return to the office. Supplies for that demand, however, are not where they should be. Gas stockpiles in Europe are already at the lowest level in more than a decade for this time of year, pushing up the cost of producing electricity.

This sequence of events led to the UK turning on coal power plants, despite periods of coal-free runs in August. Two units at West Burton A, operated by EDF, were also used on 6 September to meet electricity demand.

Meanwhile, several unplanned outages restricted electricity supply further, including units at Drax PLC’s biomass plant, RWE AG’s Didcot B, and EPUKI’s South Humber.

Finally, wind generation amounted to just 8 percent of the UK’s energy fuel mix – almost half of August’s average of 16 percent. This meant the UK grid was heavily reliant on gas and coal (both at record high prices) to meet power demands.

Looking ahead

The tightness in energy supply is likely to persist until the first quarter of 2022, leading businesses around the country to make major decisions quickly on their future energy procurement contracts.

The UK power market has already experienced significant strain through summer months, despite lower demand. The National Grid ESO anticipates much tighter supply and demand margins this winter.

Gas prices in the UK are expected to increase further, amid lower Russian supplies to Europe, a lack of LNG supply in Europe, and low European storage levels. A spell of prolonged cold weather could see prices reach as high as 200p/therm (6.82p/kWh) in the coming months.

UK power prices are expected to rise with increasing input costs of gas and coal. A lack of renewable output will further tighten the system and lead to higher prices and volatility.

However, a warm winter could cap some of the rises currently evident in the UK gas and power market. If demand falls below seasonal norms, we will see some drop in gas prices. Though as this winter’s weather is still inconclusive, the bullish price trend is expected to continue.

Those who are due for a new contract later in 2023 or beyond are likely to see prices drop.

Protect your bottom line

Energy at £150/MWh is the highest price on record. However, businesses who are due for renewal will still need to secure a price for their new contracts, despite the high costs.

So what can businesses do to protect their budgets against mounting energy costs?

1. Procure Smarter

   Short term season ahead prices are trading at all-time highs of around 150 £/MWh. However, prices for contracts for the period 2023/24 are trading much lower around a reasonable 60–65 £/MWh.
   
   Organisations that must “renew” contracts within the next 6–12 months can mitigate the short-term record pricing by “cost averaging”. These organisations should secure the longest contract term possible. This will average out any prices you pay by taking advantage of lower market prices further out on the curve.

2. Review the type of contract you procure 

   The government’s own forecast predicts that energy prices will continue to rise over the next decade, meaning that the volatility and record-breaking price rises we are witnessing now will become a common theme.
   
   Businesses need to remain flexible and open to new ideas on how they operate and when and how they consume their energy. This means that businesses on Pass Through or Flexible Contracts will have the flexibility to shift their operational hours minimally by just a few hours to take advantage of lower energy rates and avoid paying peak rates.
   
   Rather than securing your energy costs through a Fixed Rate contract, which allows little flexibility, Flexible or Variable Rate contracts may allow you to take advantage of lower energy prices depending on the time of day in which you use your energy. For example, if you use energy between 4–8pm, this is considered peak time.

   During this period, you will pay the highest rate for your energy consumption, which is typically 20 to 40 percent more expensive than other times of the day.

3. Consume energy more efficiently

   Cutting wasted energy helps businesses save money and reduce carbon emissions. In order to see exactly where and how business energy is being wasted, it is necessary to see reports of energy usage. An energy management system (EMS) is designed to do just that.

   The hardware and software technology of an EMS solution allows businesses to visually see through graphs and reports just how much energy their business is using and losing.
   
   One of the easiest ways to reduce energy cost is to optimise the way in which it’s already used. Businesses can become more efficient by reducing energy consumption – switching off lights and charging points, PCs and equipment, or using energy-intensive machinery only when required.

If you have any further questions about business energy contracts or if you want to identify opportunities to save energy, give us a call on +44 (0)3 300 300 800.