Energy Procurement Strategy- why now is the time to act.
Over the past 18 months, we have witnessed unprecedented highs and significant fluctuations in energy prices, sometimes all within the same trading session. A little over 12 months ago, forward annual gas prices stood at 334p/therm; now, the same annual contract is trading at 125p/therm.
While some are adapting to this as the new normal, the energy market remains precarious, with several factors that could rapidly drive prices up. The nature of these factors underscores the critical need for all organisations to act decisively in implementing the right procurement strategy to mitigate these risks.
In an ever-shifting energy landscape, understanding market trends is not just beneficial, it's essential for making informed decisions. The dramatic shift from 334p/therm to 125p/therm in just a year is a stark reminder of the market's volatility.
Below, we outline the factors that could impact energy prices in the coming months:
The Difference Between a Mild and Cold Winter:
In the best-case scenario, the UK experiences a mild winter, keeping prices low. However, extended cold weather can drive prices up. For example, in December 2022, with below-average temperatures, day-ahead prices averaged 268p/therm for gas and ￡241/MWh for electricity, significantly higher than current forward curves. October 2023 exemplifies the weather’s impact: an extremely mild start pushed day-ahead prices below 80p/therm, while colder mid-October days saw prices nearly reach 140p/therm.
EU Gas Storage Inventories:
Currently, EU gas storage inventories are high, but an early or prolonged cold period could rapidly deplete these reserves.
The Impact of Supply and Demand:
The Ukraine conflict has lessened our dependency on Russian gas, but it has made us more susceptible to global gas prices and activities in countries like China and India. A resurgence in gas demand from these countries could significantly affect global energy prices, including those in the UK and Western Europe.
Global Instability and Energy Security:
The instability in the Middle East, exemplified by the Hamas attack on Israel, has increased concerns about short-term energy security. This led to a 25% rise in Asian spot prices for LNG and increased crude oil prices. Qatar, a major LNG supplier to Western Europe, is being closely monitored. Any supply or shipping issues through the Suez Canal could escalate energy prices. Despite reduced reliance on Russian gas, Western Europe still receives supplies through a pipeline transiting Ukraine and LNG imports into Belgium. Further deterioration of the Ukraine conflict could jeopardise this supply.
The Sabotage of Key Energy Infrastructure:
Recent events, like the Nordstream 1 gas pipeline explosions and suspected sabotage incidents affecting Finnish/Estonian pipelines, have highlighted the vulnerability of our utility infrastructure. While sabotage probability remains low, the potential impact on energy prices is significant.
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The Need for Action: The outlined factors present risks that necessitate immediate action. Organisations should evaluate their current and future exposure. While there is a cost to being decisive in wholesale energy markets, early planning ensures greater certainty regarding energy costs and their financial impact on business operations.
Navigating the complexities of the energy market requires more than just observation; it demands proactive strategy and foresight. The factors influencing energy prices are as unpredictable as they are impactful, making timely action not just a choice, but a necessity for organizational stability.
A cold winter and increased Middle Eastern instability can have unpredictable financial impacts. We advise against waiting for the market's bottom, as its timing is uncertain. Implementing an appropriate risk management strategy, whether through a fixed energy contract, entering a flexible procurement basket, or a standalone flexible procurement strategy, is crucial.
For assistance in exploring your energy procurement options, reach out to our team at eEnergy.com
Author – Alastair Hutson
Article published 16.11.2023
All prices correct at time of publication
About eEnergy.
eEnergy (AIM: EAAS) is a digital energy services company, empowering organisations to achieve net zero by tackling energy waste and transitioning to clean energy, without the need for upfront investment. It is making net zero possible and profitable for all organisations in four ways:
eEnergy is a Top 5 B2B energy company, currently managing 4.6TWh of energy for 1,800 customers across the public and private sectors.
eEnergy has been awarded The Green Economy Mark by London Stock Exchange.
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