Business electricity buyer's guide. Part 1: What to watch when energy prices are rising


Looking for a new business electricity supply quote? I’m afraid you might be in for a bit of a shock. Wholesale power prices rose by 20% during April and May. As this feeds through directly into your next quote, your new price will probably be a lot higher than your current price.

What can you do to get your best electricity price? Read this buyer's guide.

Part 1 below will help you make sense of this price volatility, so you know how to spot when costs represent good value and it’s a good time to buy.

Part 2 (here) lays out the energy buying techniques and strategies that will help you get the best deal for your business in these challenging market conditions.  

Ready to get started? Read on for what to watch to keep track of the wholesale power price, helping you make the best buying decision.

Why the sudden focus on wholesale power costs?

Until recently, non-energy costs (the large group of transport and environmental charges) have dominated our updates about your future business electricity prices. And for two good reasons. They now make up some 60% of your price and have been the biggest risers for the last five or so years. 

But recent market volatility has reminded us that you can’t take your eye off the energy cost (the cost of power on the wholesale market). This is still the single biggest component of your electricity price making up the other 40%. And it’s risen by 20% in the last two months.

How changes to wholesale power costs make a big difference to your quote very quickly

Here’s a quick explanation of how these two groups of costs feed through to the quotes we give you:

  1. The wholesale power cost (energy cost) changes constantly but normally by small amounts. Sometimes the movements can be large. For instance, with growing intermittent renewable generation and the lack of ways to store energy in the UK , when it looks like supply may struggle to meet demand the wholesale power price can spike. But regardless of whether the day to day movements are large or small, they instantly affect the electricity price offered to you by suppliers. That’s because your price reflects the wholesale power price on the day we quote you.  

             

  2. Non-energy costs are a bundle of charges. These tend to change less often but in larger jumps. So in an average week, you’re unlikely to see any difference to a quote on Monday vs Friday arising from the non-energy costs. 

What’s causing prices to rise?  Will they rise further?

The question you should be asking now is: will the power price continue rising beyond £55/MWh or will it fall back to the recent ‘normal range’ around the £45/MWh mark?

 

Your answer lies in checking what we call the market fundamentals – the main factors that cause wholesale power costs to rise or fall. There are several of them, but it’s definitely worth keeping an eye on these three:

  1. The geo-political climate: Events on the world stage can have far reaching impacts, including on commodity prices. With the price of power being closely linked to other commodities (mostly coal, gas, carbon and oil), changes to those markets have a knock-on effect. Recent American sanctions on Iran are a prime example of this. This will reduce global oil supplies which can drive up the price per barrel of oil (which you’re now feeling at the forecourt) which pushed up power prices. 
     

  2. Gas prices: Gas to power generation made up 40% of the UK power supply mix across the winter of 2017/18, with its flexibility heavily relied on in peak times. That’s why the cost of gas plays a key part in setting the power price. Gas prices rise when supplies are lower than normal. And that’s exactly the problem we’re seeing now. Following a winter pipeline outage and a late cold snap delivered by the beast from the east, Europe entered the summer period with acutely low gas storage levels.  Although, there is a chance of starting this winter with much lower levels of storage than normal. That increases the risk of more price volatility.
     

  3. The price of oil: Oil prices will have an impact on longer term gas prices, with many gas contracts being indexed to the price of oil. So expect any increases here to track through to the wholesale power market. The continuation of the OPEC backed supply cuts have contributed to a 40% increase in price per barrel since the start of 2017. However, uncertainty regarding OPECs next steps, U.S. crude production and further sanctions on other oil producing regions will make this market exciting to watch.

Many other factors influence the price of power: generation costs like carbon and coal; supply and demand factors like unforeseen power station outages and unseasonal weather variances. 

How to keep track

Market Insight - Use our online portal to track commodity prices and get the latest view from our analysts on what’s driving these. You can also get the latest wholesale power market prices alongside expert commentary in our fortnightly market pulse. We’ve created this handy infographic to help you get the most from the tool.

Talk to your account manager – Speak to us today to discuss your next contract. We have a range of contracts to suit your needs and help you make the right energy decision for your business.

Read Part 2 of our buyer's guide - Two insider tips and three buying strategies to help you deal with rising energy prices

Bio

Posted by Talk Power Team

The Talk Power Team is here to keep our business community up to date on industry news, our Talk Power live events and to bring you useful information to help you manage your energy. 

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