Member Article

Why higher energy prices shouldn't be a shock and how to manage the impact

It should come as little surprise that wholesale energy prices are on the rise again and remain highly volatile, says Michael Dent, Managing Director of Inprova Energy.

The wholesale energy market is heavily impacted by the oil market and so we have seen energy commodity costs tracking dramatically higher oil prices as that market recovers from the doldrums.

At the time of writing (17 September 2018), power commodity prices were 50.26% % higher than just six months ago. On top of that, non energy/ third-party costs are also rising sharply and now account for up to 60% of a total energy bill ¬¬¬¬– up from 30% just six years ago.

Some businesses who locked in to fixed electricity contracts three years ago when prices were extremely low are facing price increases of 30-40% for renewals this October.

Commodity market cycle

This upturn in the market cycle shouldn’t come as a surprise. Energy is little different to other commodity markets, which all run in cycles. You can trace Sterling, oil, energy, etc over the last 15 and 20 years and the same pattern happens over and over again. Markets spend a period going up, then they spend a period of time going down, and on and on. The only difference in the current market is that there are dramatic swings in between. In fact, In the last year alone, wholesale power prices swung by around 45%, which is twice as volatile as the previous five years.

Energy commentators, such as Inprova Energy, have all been reporting on the turbulent state of the wholesale energy markets and the upward pressures on prices, compared to some of the historic lows we saw only 3-4 years ago.

During the period 2014-2015 when we saw a collapse in oil prices, which also sent energy prices plummeting, businesses were advised to use some of the large savings to mitigate against future price increases and system changes. Those who heeded this advice and moved to less risky flexible energy purchasing strategies and invested in energy efficiency to reduce their consumption, are now better able to ride the storm.

Will energy prices rise further?

Given current market volatility, it’s impossible to say whether prices will rise further and by what margin. Nobody knows where the peak will be, so there is potential for more bad news. What is more predictable is the rising cost of third-party energy charges. For example, on 1 April 2019, Climate Change Levy (CCL) will jump by 45% on electricity and 67% on natural gas to offset the abolition of the Carbon Reduction Commitment (CRC).

How to mitigate higher costs

It’s never too late to take action to mitigate higher and rising energy cost, but there is no time to delay. Businesses must recognise that energy is a major cost item and treat it as a strategic board room issue, requiring more structured long-term energy procurement planning aligned with a deliberate energy strategy.

Organisations should consider flexible purchasing (underpinned by a robust risk management strategy). This will allow them to take advantage of market volatility to buy in tranches at opportune times when the commodity market dips, particularly by locking in to more attractive forward prices.

Improving energy efficiency

It is imperative that businesses reduce their total energy usage and get smarter in reducing energy demand at times of high cost peak energy costs, such as Triad periods. Prioritising energy efficiency can pay big dividends. A typical ESOS audit or energy survey by our assessors will identify savings opportunities of 5 to 20%. Many of these recommended actions can often be delivered at low or no cost or with rapid payback on investment.

Those businesses that are treating ESOS solely as a compliance exercise to meet the mandatory regulatory requirements are missing out on a major opportunity to mitigate and, perhaps, reverse rising costs.

As the government strives to achieve climate targets, energy efficiency is rising up the agenda. The Streamlined Energy and Carbon Reporting scheme (SECR) will start in April 2019 and will require both quoted and large unquoted companies and limited liability partnerships to report annually on their total energy use and carbon emissions, as well as the actions they are taking to improve efficiency. It’s, therefore, a good idea to start thinking seriously about how to minimise energy consumption and improve sustainability.

It may also be appropriate for organisations to look at onsite generation, such as renewables or combined heat and power, together with the prospect of battery storage. This can also increase energy resilience, as well as offering opportunities to earn revenue from Demand Side Response schemes.

Don’t wait for the eye of the energy storm to take action on reducing energy costs; the time to act is now.

This was posted in Bdaily's Members' News section by Inprova Energy .