Member Article

Energy costs: Will they keep on going up?

Have business energy prices peaked, or will the market rise further? Inprova Energy Director Magnus Walker discusses the the current volatile state of the wholesale energy market and what businesses can do to combat sharply rising energy costs.

It seems like every day the cost of energy is going up. Electricity, gas, oil; it’s just one-way traffic – with emission credits for fossil fuel generation jumping around like a Bitcoin wannabe market.

Why energy costs are soaring

Today (25 September 2018), oil prices have hit a four-year high of $82 a barrel, contrasting with sub $30 prices seen two years ago. Since oil prices directly influence wholesale energy markets, we’re also seeing rocketing energy prices, with power prices up by almost 20% compared to the past 12-month average.

It shouldn’t be too surprising that energy costs are going up. The precipitous fall in oil, which hit a low point of $28 in 2016, had to climb back. At this low price, there was no incentive to pull the stuff out and sell it, so a market correction was inevitable, particularly since it was reinforced by global economic recovery and renewed demand for energy, which continues.

There’s little sign that the oil market recovery has peaked. OPEC continue to restrain output and Donald Trump’s latest call to increase production has been rejected by both Saudi Arabia and Russia. Meanwhile, Trump’s Iranian sanctions are preventing Iranian oil from readily meeting some of the pent up demand. Given this economic and political reality, what is going to stop this increased oil consumption and pressure on prices? Maybe another global recession, but it is probably not imminent.

The challenge for UK businesses

As for UK electricity and gas, we are caught between buying oil in Dollars, European electricity in Euros and competing for LNG against everyone across the world! The fact that the pound has been hammered by every Brexit utterance and raised EU eyebrow, means the commodity cost for the energy consumer is unlikely to be something that can be reasonably forecastable with any degree of certainty for some time yet.

At the same time the UK moves to decarbonise its energy generation. This means that renewables costs plus associated transmission and distribution costs, will continue to increase, and the non-commodity portion of electricity bills, or third party charges, will only rise and rise.

So where now for the markets?

My personal opinion is that with energy levels back at where they were a few years ago, the low points of 205-16 were an anomaly. As such, we need to get used to these higher levels and plan for potentially even higher prices. Do not ignore the issue and do not assume the higher prices will disappear– I don’t believe they will.

These are extremely challenging times for businesses, but buying your energy should not be a lottery – and hiding your head in the sand is not the answer, especially at the moment!

What can you do to combat rising energy costs?

Energy is a major business overhead and so organisations need to take a structured and long-term approach to energy procurement and trading, coupled with a robust risk management strategy. Flexible purchasing strategies are more attractive than ever, given that this allows you to use the extreme market volatility to your own advantage to buy at points when the market dips and lock into more attractive forward prices.

Planning is a necessity. Where possible, it is advisable to use professional purchasing teams with full and live market access, that can work with you, help you incorporate realistic energy costs and keep you updated.

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