As the prices on energy continue to rise in the UK, Business and Energy Secretary Greg Clark wants to press hard on energy firms and mitigate the damages of energy pricing, claiming they are milking loyal customers in light of inflation.
In the last few months, most UK energy providers raise their default tariffs to consumers, blaming investment requirements, government demands and the falling value of the pound.
Finance Monthly heard Your Thoughts on the price spike this week, and below are a few comments from experts on the matter.
Magnus Walker, Director of Trading and Risk, Inprova Energy:
Nothing’s ever certain in the highly volatile energy markets, but the general wisdom is that prices are rising – driven both by a return to more bullish wholesale commodity market conditions and sharp increases in non-commodity charges.
According to the latest analysis from energy market tracking company ICIS, the cost of power in the first quarter of 2017 was almost a third higher than the same period in 2016, while forward gas commodity prices were up by 42% year on year. This market level has since softened, but we’re unlikely to witness the very low commodity prices of winter 2016, largely because the price of oil has since doubled. Nevertheless, market costs fluctuate dramatically, dependent on a range of external factors, which is why it’s so important to pursue a smart long term purchasing strategy to mitigate the impact of higher prices.
By contrast, businesses have little wriggle room to avoid sharply rising non-commodity costs. Five years ago, these charges accounted for about 30% of a total power bill, but in today’s market it’s about 55%. The continued need to remove polluting coal plants, incentivise greener energy supplies and retain security of supply, is expected to drive these charges up to around 60% of total power costs by 2020. For gas bills, there’s a split of around 65/35% wholesale to non-energy costs.
Whether using a fixed or flexible purchasing strategy, forward planning is critical. It’s commercial suicide to renew a fixed contract at the last minute when you may be forced to purchase at the height of the market. Instead, it makes more sense to lock in to favourable rates well in advance of the contract renewal date.
Fixed rate contracts do offer budget certainty and simplicity, but flexible purchasing offers more opportunity to buy chunks of your energy volume at points in time when the commodity market dips and still provide budget certainty. Your trading strategy must, however, be underpinned by a robust risk management strategy that matches your requirements. A good strategy ensures you never hit the top of the market. This is a far more considered approach than 1:365 odds of picking the day of the year when the market is at its lowest to fix a deal.
It’s essential to seek expert, trustworthy professional advice to navigate the complexities of the energy market. If you’re using a consultant, make sure they have full and live commodity market access, buying performance supported by evidence, and that any recommendations are fully aligned with your needs and attitude to risk.
Of course, the cheapest energy is what you don’t use. Effective data management is especially important in illustrating how you are consuming energy and pinpointing where you can make savings.
Phil Ivers, Head of Customer Optimisation, Gazprom Energy:
Wholesale energy prices have an impact on the cost of gas and electricity for the end user, as market increases will be reflected in the rates that energy suppliers offer. Government policies, such as subsidies to support renewable energy projects, can also contribute to increases in energy rates.
For small businesses, a long-term, fixed-price energy contract may offer the best protection against rising energy prices. This is when the total energy price is fixed for the duration of the contract term, meaning it won’t change in line with the wholesale energy price.
Those managing business energy contracts should keep an eye on wholesale pricing and the market in general, so as to avoid surprises when their contract ends. It’s also prudent to pay attention to factors likely to affect the wholesale market, which can include weather conditions, current affairs and world events.
By keeping abreast of price fluctuations, you can pinpoint the right time to lock into a suitable energy contract – and remember, you don’t need to wait until your current contract is nearing its end date to put in place future arrangements because many suppliers can offer contracts that start in 12 – 24 months’ time.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!