Market factors behind higher energy prices

If you are looking to renegotiate your energy contracts at the moment, it probably hasn’t escaped your notice that prices are high.

In this article, we explain the cause for the rise and an option which may allow you to avoid the worst of the increases.

Why are energy prices high right now?

Gas is still the primary driver impacting prices and accounts for around half of UK electricity generation.

Wind and solar, which account for 30% of generation, have both been low recently, especially wind, which is the largest single renewable source.

In turn, this has put increased pressure on gas for electricity generation, which was already in demand due to people being at home during the winter lockdown. However, gas supply has also been impacted by storage, which is at only 50% of the levels recorded last year, and pipeline outages, along with delays over the Nord Stream 2 pipeline completion date.

All of these factors increasing gas demand have contributed to a rise in wholesale electricity prices, which are running at almost double their seasonal norm. Carbon prices have also gone up, with an expectation of a tightening of regulation.

Our forecast

The pipeline outages are having a short-term impact on prices, which should ease when full capacity is restored. Whilst not guaranteed, we are also expecting more gas supply into the UK from other sources, which will reduce the pressure on winter pricing.

What options do you have now?

Your decision will depend on when your supply contract ends.

If you are looking to renew your contract now, you will almost certainly be seeing an increase, so you might want to consider moving to a flexible purchasing option which is something more and more of our clients are interested in.

This allows the option of making incremental purchases meaning you are not fixing all your volume in one go. By using this arrangement, you have the opportunity to take advantage of a future bearish market.

Purchases can be made well ahead of the delivery date at a time where we see a drop in wholesale prices. Additional fixes can be made until the whole volume is hedged, or we can allow a percentage of unhedged volume to float, thus reducing your exposure to market volatility.

If you would like any support or advice on what you might be able to do, please do get in touch.