It’s been a turbulent week for the UK energy system, and over last few days, the challenge faced from soaring wholesale prices has escalated significantly. In this article, we hope to provide some background on the situation and how it might affect our clients.
What’s behind the surge?
The immediate crisis is due to a shortage of electricity, driven by three main factors:
1. Reduced wind generation due to calm weather and the lowest summer wind speeds in 60 years.
2. Several nuclear plants are unexpectedly offline, following maintenance.
3. A large fire shutdown a major power cable that brings in electricity from France.
To make up the shortfall, our energy system looks to utilise gas-fired power plants. However, we’re experiencing gas scarcity driven by three main factors
1. Record demand for liquified natural gas across Asia, as economies rebound from the pandemic.
2. Reduced supply from Russia, who are accused of compounding the situation.
3. Depleted storage levels in Britain.
It is a perfect storm of market forces, with reduced supply and increased demand being the overarching culprit.
How has this affected prices?
According to industry group Oil & Gas UK, wholesale gas prices have soared by 250% since January, with a 70% increase since August alone.
Whilst energy suppliers do usually allow headroom for market fluctuation, the unprecedented spike has meant that customers are now paying less for energy than it costs suppliers to purchase energy. This is an unviable business model, and naturally presents significant challenges for suppliers.
Several small energy firms have ceased trading in recent weeks, and now the domino effect of the energy crisis seems to be in full swing. Government has held crisis talks amid fears more suppliers could collapse, with some analysts predicting the UK could have just 10 energy suppliers by the end of the year.
What this means for our clients
We’d like to assure our clients that fixed-term contracts are not at risk and will be honoured by the supplier until the agreed contract end date.
The energy suppliers we work with are well established, with solid backing and reliable hedging strategies in place.
In instances where fixed-term contracts are coming to an end, we appreciate that some customers are finding it difficult to decide on their next contract and whether to renew. Our Energy Managers are monitoring the market daily and will present a variety of contracting options for 2021/22.
Please be aware that contract offers are having to be updated more frequently to reflect market fluctuation, and as such may only be valid for a short period of time.
We will do all that we can to support our clients through this challenging time. If you have any queries, please get in touch with your dedicated Energy Manager who will be happy to assist.