Balancing planet and profit during unprecedented market volatility

Wholesale energy prices have experienced unprecedented levels of volatility since the end of summer 2021, with both day ahead/spot and future contracts surging to all-time highs. In the last couple of months, prices have decreased but still remain high compared to a year ago. This period of high energy prices is expected to continue for the foreseeable future (see next section). Energy prices have surged for a number of reasons: A global increase in gas demand following the ease or end of Covid-related restrictions throughout 2021. After the pandemic, economies across the world started to recover. Asian countries like China saw their imports of Liquified Natural Gas (LNG) increase. This resulted in lower LNG shipments to the UK and Europe. On the supply side, the Covid-19 lockdowns pushed some maintenance work from 2020 into 2021 at a time when demand was recovering. In 2021, gas production hit a record low of 363TWh, 47TWh below the previous record low in 2013. Low production was the result of an extensive summer maintenance schedule which saw shutdowns at several major terminals, as well as the Forties Pipeline System which serves a significant proportion of UK gas and oil production. A lack of wind in the summer resulted in higher demand for conventional power. European gas storage in 2021 and Q1’22 remained far below previous years and it’s unclear how these are going to be replenished in the summer given the concerns around supply including the potential suspension of Russian gas flows due to sanctions. The 1,234km offshore Nord Stream 2 gas pipeline, which was designed to double the flow of gas between Russia and Germany (and by extension the rest of Europe) has been abandoned following the invasion of Ukraine. Gas storage in the UK is extremely minimal with capacity at less than 2% of the UK’s annual demand, compared with 22% for other European countries. Whilst the UK is not heavily reliant on gas coming from Russia, it sources almost half it’s gas supply from Europe. Hence, wholesale gas and power prices in the UK are now subject to knock-on-effects from the conflict in Ukraine.

Amidst rising energy costs, digitalisation, growing pressure from stakeholders and increasing regulation, organisations may struggle to define their pathway to a low-carbon future. What can you do to protect your business’ net zero plans from the challenges of volatility? Disruption and volatility are putting organisations under pressure. Digitalisation and new technology developments continue to challenge existing business models. Its increasing dependence on energy and encouraging businesses to drive change to secure competitive advantage. And as customers, employees and shareholders look to engage with companies who understand the importance of decarbonisation, pressure is mounting to prioritise sustainability.

As part of Ofgem’s Targeted Charging Review (TCR), the way in which Network Operators recover their costs from suppliers is changing. It means from the 1 April 2022, the distribution of these network charges will partly shift away from Unit Rates and into Standing Charges. And as a result, energy suppliers may change the way they price their electricity contracts. But what exactly does this mean for your business? Ralph Smith, Non-Commodity Cost Analyst at British Gas, outlines the new changes coming our way and how your business energy costs may be effected.

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