Wholesale energy expenses, which account for 45 percent to 55 percent of a company’s energy expenditure, fluctuate daily and year to year. If your fixed-term corporate energy contract is about to expire, you may be asking why the renewal price is lower or higher.
Changes in energy prices can aggravate business owners, especially if they have little financial flexibility. Understanding some of the underlying market drivers, on the other hand, can help you make better decisions regarding your energy contract in the future.
A wide range of factors influences wholesale energy costs. Some energy is purchased short-term to satisfy surges in demand, but the majority is purchased in advance. Power plants, gas producers, and importers sell gas and electricity wholesale. The Utility Bidder can provide a basic understanding of wholesale energy markets to appreciate the complicated interplay of elements fully.
Supply And Demand
In economic theory, supply and demand is the underlying relationship that determines the price of every item. An equilibrium or market price is created when the amount of energy a producer is willing to sell at that price equals the number of electricity businesses are willing to acquire.
Some causes, such as geopolitical events or natural disasters, will constrain the energy supply, causing the supply curve to move to the left and prices to rise. Other factors, such as bitterly cold temperatures, will raise demand, causing prices to rise.
The United Kingdom used to be able to produce all of its gas. However, as North Sea gas supplies have depleted, the government has had to increase its natural gas imports. The UK must pay at least as much as European countries to attract gas through pipelines to keep the gas infrastructure fully supplied.
When there is a gas scarcity, the market price of gas might skyrocket. When pipelines or gas fields are offline, these shortages might arise. If a gas field goes offline for scheduled maintenance, this isn’t a big deal because other sites can pick up the slack. On the other hand, unplanned maintenance might stifle supply and result in significant price rises in the short term.
Currency fluctuations can affect gas and electricity like other internationally traded commodities. Because a large portion of Britain’s gas comes from Europe and electricity costs are connected to gas prices, the pound’s strength versus the euro impacts gas and power prices in the United Kingdom. Prices tend to reduce when the pound is strong against the euro since gas and electricity become less expensive. When the pound falls in value, prices tend to climb.
The United Kingdom is the world’s largest offshore wind generator, accounting for about 40% of global capacity. In 2018, onshore and offshore wind turbines supplied 17% of the UK’s electricity. And it is only going to get worse. By 2030, the government wants offshore wind projects to generate a third of its electricity.
Wind contributes a major share of the UK’s electrical mix on windy days. When the wind is not blowing, more natural gas is channeled to power plants, raising prices. Because of the growing reliance on wind turbines, a prolonged period of no wind might cause gas prices to rise.
This one is self-evident. The need for gas and electric heating decreases as the temperature rises. Similarly, if temperatures drop, demand for gas and electricity may rise, raising prices. Prices for wholesale gas and electricity are frequently tied to projections because they are typically purchased in advance.
Short-term forward prices will likely decline if a ten-day prediction indicates that the weather will be very pleasant. Forecasting long-term temperatures are more difficult. However, there are some ambiguous indicators.
Carbon pricing, or having a price on carbon pollution, aims to reduce emissions and encourage investment in cleaner technologies and practices. Carbon pricing, economists believe, is the most effective strategy to reduce greenhouse gas emissions.
Only certain heavy industrial enterprises are required to pay the carbon price under the EU Emissions Trading System. Still, this list includes power generators, which transfer the cost of carbon down the supply chain to private households and businesses. The EU ETS is based on a cap-and-trade system. This means that the EU has set a limit on the overall amount of greenhouse gases that can be emitted in the future.
Companies purchase or get emissions allowances, which they can exchange as needed. Carbon prices fluctuate from week to week and month to month, but as the overall number of permitted emissions decreases, the permits become more expensive. Prices have been steadily rising since the market was altered in 2017.
The price of EU carbon emission permits doubled in the year after the reform, significantly impacting businesses. According to Carbon Tracker, if the European Commission legislates to reconcile existing emissions objectives with the Paris climate agreement, EU carbon prices could double by 2030.
Coal and gas power plants are particularly vulnerable, and their operating costs have skyrocketed in recent months. Carbon prices will almost certainly continue to climb in the future, but as more green investments are made, the price of carbon will become less meaningful.
Global events have a significant impact on oil prices, which in turn has an impact on gas and electricity prices. Conflict or a natural disaster in an oil-producing or gas-producing country will limit output and access, driving up costs.
Britain has become more dependent on imported gas during the previous two decades due to declining reserves in North Sea gas fields. Since 2004, the United Kingdom has imported more gas than it has generated, making it more vulnerable to global events that affect supply.
The 2011 Libyan crisis drove oil prices to a two-and-a-half-year peak, while the Fukushima nuclear disaster boosted Japanese demand for LNG, driving up prices. The price of oil has lately risen due to a political crisis and US sanctions in oil-producing Venezuela, which has had a knock-on impact on gas and electricity prices.