Archive for the ‘Electricity procurement’ Category

UK energy markets spiked in the immediate aftermath of the Brexit vote, mainly due to the weakness of the pound making fossil fuel imports more expensive. They’ve since fallen back a little though remain up from their Jan-April 2016 lows.

In the next few years a number of issues will impact the price paid on your next energy contracts:

  • Informal discussions between Opec and non-Opec countries may result in some kind of agreement to cut back oil production (many leading producers, including Saudi Arabia and Russia, are suffering from the current low price), which would increase the oil price from its current US$45-50 level, and could in turn would push up gas and electricity prices
  • Exchange rate: if the pound continues to strengthen against the dollar and Euro those increases may be negated, but with the exact nature of Brexit still to be confirmed there remains a significant level of currency uncertainty and risk
  • In the longer-term the market sees wholesale electricity costs falling on the back of reduced demand (due to efficiency improvements) and a greater contribution from renewables
  • However, this possible easing will likely be countered by increases in non-energy chargestransmission, distribution and government charges/taxes (including those subsidising renewables)

Despite recent market fluctuations it remains a good time to be looking at longer term contracts, taking advantage of the relative market lows while minimising the risk from price spikes.

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Leaving energy contract renewals until the last minute is all too easy but could leave you paying unnecessarily high prices. By starting the process at least 6 months in advance, preferably sooner, you’ll reduce exposure to the volatility of wholesale energy markets and ensure you’re in the right contract for your organisation.

  • comparing prices can be difficult: don’t rely on comparing unit rates as the best way to evaluate competing offers – different suppliers handle non-energy costs (green taxes, distribution charges etc) differently, with some including them in the unit rate where others don’t. Ensure you’re comparing like-for-like as making a decision based on the wrong data could prove costly.
  • plan ahead: volatile wholesale energy markets offer both an opportunity and threat – timing your renewal for when the market is low could generate savings, but get it wrong and you could pay a premium. Track the market (or work with a consultant who does this for you) to buy when the market is in your favour.
  • don’t wait until September: most commercial energy contracts renew in Sept/Oct, which means suppliers are at their busiest and can sometime pick-and-choose who they work with, meaning prices may push up. Avoid the Autumn rush and give yourself time to identify the most suitable offer for your organisation.
  • support budgeting: rather than add a % cost to next year’s utility costs, request a renewal quote from your supplier at budget time – even if you don’t sign a new contract at that point you’ll gain useful market intelligence that informs next year’s financial planning
  • contract complexities: suppliers are coming up with new and innovative products – flexible, market trackers, baskets, risk managed – alongside the traditional fixed contracts, which offer opportunities but which can also be difficult to decipher. Ignoring these options could be a missed opportunity however, and while time is needed to ensure you’re selecting the right contract-type for your business, you could be missing out by staying with your usual fixed contract.
  • never go out of contract: out-of-contract rates and automatic renewals are very, very rarely the best option, and are often up to double standard rates so make sure you renew in plenty of time
  • energy efficiency success could impact your supply contract: if you’ve succeeded in reducing consumption it’s worth making sure that your new supply contract takes this into account so you avoid take-or-pay penalties.

Warnings that the gap between the UK’s generating capacity and potential demand is at its lowest level since the 1970s have increased business fears about security of supply, according to the CBI.

A survey of CBI members found that UK companies are losing confidence in the security of energy supplies, with 80% of respondents taking fears over future supplies into account when making investment decisions, and 74% factoring in future price rises.

Theses findings come at a time when wholesale energy markets remain at historically low levels. Above average temperatures, a low oil price and high levels of gas storage after the mild weather last winter have continued to keep a lid on both gas and electricity prices.

This means that any organisation with contracts due to terminate in 2015 would be advised to check their options – several Energy & Carbon Management clients will experience reductions in their next contracts by locking in their next contracts now.

July’s hot weather dampened energy market activity despite increasing electricity demand due to increased air conditioning loads. Electricity prices remained stable compared to June, up only 0.86%, while gas saw a similar rise of 0.92%.

Compared to June 2012, however, energy prices have increased: electricity is now 2.31% higher than a year, ago, with gas up by 8.62%. The relative price stability reflects both moderate demand (influenced by the stumbling economy), strong supply margins and the introduction of the carbon floor tax at expected levels.

In the longer-term falling UK gas production and increased reliance on Europe and Middle Eastern imports will continue to lave the UK vulnerable to geo-political price risks.

Energy & Carbon Management’s February energy price review shows the wholesale energy market remains fairly stable:

  • The UK’s stumbling economy (including loss of its ‘triple A’ credit rating), the weakness of the pound and low retail sales contributed to a decrease in prices compared to a year ago: 3.37% in the case of electricity and 0.95% for gas
  • Compared to the end of January however, prices increased slightly: 1.5% up for electricity and 2.25% for gas, in part due to the reduction in gas storage volumes during the recent cold weather

As the winter is almost (hopefully!) behind us, anticipated warmer weather means that these increases are not projected to continue in the next couple of months.

With energy prices expected to rise in the longer-term however, it’s important to monitor the energy market to ensure that you don’t get hit by a sharp price increase come renewal time, and are positioned to take advantage of any dip in gas and electricity costs.

Many businesses, large and small, benefit from the expertise provided by energy consultants/brokers to navigate the complex world of energy prices and contracts. Up to now however, these consultants have not been subject to any regulation, a situation which could be about to change.

Ofgem, the UK energy regulator, is requesting the government grant it power to regulate the energy brokerage market, possibly including the introduction of an accreditation scheme. The aim is to prevent misleading marketing and miss-selling as part of a welcome move to make the commercial energy market clearer and fairer for businesses.

Many reputable consultants have already signed up to the Codes of Conduct of either the Association of Cost Management Consultants or the Utilities Intermediaries Association, on which any future Code is likely to be based. These Codes include a commitment to:

  • Building sustainable business relationships based on honesty, integrity, openness, and fairness
  • A client agreement including at least: definition of scope; period of validity; duties of Client and Consultant; fees and charges; cancellation and termination clauses; and mutual confidentiality
  • Disclose the source of fees
  • Providing good quality information, presented clearly and concisely in a timely manner with neither positive nor negative bias
  • Maintain clear and appropriate communications with Clients

Another factor to consider when talking to energy consultants is to ensure they cover the entire supplier market and not just the ‘Big 6’ (British Gas, EDF, E.ON, Npower, Scottish & Southern and Scottish Power), but also newer entrants to the market such as Haven Power, Gazprom, Corona, First Utility and, Dong Energy.

By working with ACMC or UIA accredited consultants – who also cover the whole market – you can be sure to receive a service appropriate to your needs.

In the last five years energy prices have risen by 100+% and fallen by as much as 50%, due to factors as varied as the collapse of Lehman Brothers, conflict in the Middle East, the Fukushima nuclear disaster and the Eurozone debt crisis.

Earthquakes, conflict, elections and economic troubles all impact the price businesses pay for energy

About the only thing these global events have in common is that they directly impact British businesses, stretching already tight budgets and adding to existing market uncertainties.

But how can you mitigate this price volatility – and steal a march on your competitors?

  • Don’t wait until close to contract renewal to check rates, as this is unlikely to be the best option: prices could be 10, 20 or 30% higher than they were just a few months earlier, while varying by just 5% between suppliers
  • Continuously monitor the energy market, as it’s now possible for most commercial energy users to lock-in contracts up to three years in advance

As well as being volatile, energy prices are on an upwards trend, so contracting your energy use for 2014 and 2015 insulates you against future price movements.

A long-term energy strategy also means you know the exact gas and electricity unit rate you’ll be paying for the next 2-3 years, improving your budgeting and forecasting accuracy.

Continuously monitoring the energy market means you can avoid price spikes and benefit from price drops, potentially making significant savings, while stealing a march on competitors who continue to rely on luck rather than judgment in managing their energy costs.