Wholesale gas prices have surged by 250% since the beginning of the year, disrupting the country’s supply chains and driving prices significantly upwards marketwide. But how will this impact your business’ energy consumption? And how can you protect yourself from upcoming surges?
Gas prices have skyrocketed over recent weeks, putting several energy suppliers out of business. This rise has been caused by a range of issues that have plagued the market since the beginning of the year including planned and unplanned maintenance to supply pipelines that had been delayed throughout the Coronavirus pandemic; failure to recover from the unusually cool spring which diminished the UK’s gas storage; poor supply into Europe from Norway and Russia that have forced us to make unusual withdrawals from our stores throughout the summer; and the redirection of LNG tankers towards Asia due to their higher market prices, limiting arrivals to European hubs. Extreme weather conditions and shock fires across pipelines have also contributed to supply chain delays that have only served to exacerbate supply and storage shortages.
All of these factors, coupled with the uncertainty over how supplies will meet increasing demand as we progress into winter 2021 and spring 2022 has rocketed the markets, leading some energy providers to go bankrupt under the pressure.
Unfortunately, the rise in gas consumer prices is having a massive impact on business energy prices, with Robert Rennie, global head of market strategy at banking corporation, Westpac, declaring: “We’re looking at not just the UK and Europe but a potential global energy crisis coming into winter”.
How can you protect yourself?
Since the future of the markets is still unclear, we recommend clients look towards longer-termed contracts where feasible to protect themselves from further price rises.
Although businesses who are already in “fully fixed” contracts are protected from the ongoing increases, those with variable elements in their contracts are likely to be at risk depending on the terms of your contracts and how much of your wholesale prices are fixed.
Additionally, businesses who are out-of-contract or with contracts that are due to end are faced with a relatively tough decision:
- Take the short-term risk by accepting the substantial rises (potentially 200-300% against January 2021 prices) and remaining out of contract or on a 6-month with the hope that markets will have eased once we come out of the winter 2021 period.
- Take the mid-term risk by placing a 12-month contract which covers both the highs of the autumn-winter 2021 but is levelled down slightly by including the spring-summer 2022 period (potential increases of 50-100% against January 2021 prices).
- Take the long-term risk by placing a 24–36-month contract which covers several winter-summer market swings to help average out the current highs we are experiencing (potential increases of 30-60% against January 2021).
When will markets settle?
Although the situation is seemingly at a crisis point, we are hopeful that as we progress through this challenging period and past the colder winter months, prices should start to ease. Though it is difficult to predict when exactly the markets will begin to correct themselves.
Factors such as demand throughout winter 2021 – spring 2022 and long periods of below-average temperatures may exacerbate the shortages and drive prices higher. On the other hand, the completion of the Nord Stream 2 pipeline from Russia will help to ease current markets. If we also experience a period where minimal unplanned maintenance occurs and we have long periods of high wind to drive renewable power and reduce the need for gas-to-power generation, we are hopeful prices should begin to level again.
However, due to the current uncertainty and number of contributing variables, we believe it is unlikely markets will return to ‘normal’ within 6-12 months. Of course, we will be monitoring the situation closely and keeping you updated as markets change.
Here to help
We understand that amid the confusion it can be difficult to decide which solution suits your business best. Get in touch with us for advice on how to manage your energy through this turbulent time.
