How businesses can mitigate against energy price rises heading into 2022
The UK has experienced soaring energy prices since March 2021. Prices for power reached as high as £128 per MWh by early October. As we head into December 2021, power prices have hovered near the £220 per MWh tag.
These record prices have troubled businesses across the UK. The food and beverage and fertiliser industries, for example, have struggled to meet product demands because of tight and expensive energy supplies. Power-hungry sectors such as steel, glass, and chemicals have battled soaring gas and electricity costs that have caused higher prices of goods. These are just a few examples of sectors and businesses who have faced challenges during the energy crisis.
Why are energy prices so high?
A combination of factors – low wind generation, low European storage, intermittent Russian supplies, post-pandemic demand surges, competitive LNG markets abroad, power system outages, and cold temperatures, to name a few – have consistently pushed prices to record heights during the back half of 2021. These bullish trends are expected to continue as we head into 2022.
“At the same time,” say analysts from McKinsey & Company, “price volatility is reaching new heights as a result of the uncertain output of renewable assets and a tight supply-and-demand balance in the European power system.”
In the face of these challenges, businesses who either must renew their business energy contracts soon or in coming years can protect their budgets and bottom lines this winter and next year by procuring more wisely, adjusting operations during off-peak periods, powering down idle or unused equipment, and improving energy efficiency.
“Navigating this next normal will be a key challenge for utilities, traders, and large power consumers, and that highlights the importance of developing resilient power-asset portfolios and managing risk,” said McKinsey & Company.
What can cause energy prices to dip?
Western European countries such as Germany, the Netherlands, Austria, and parts of Italy have reinstated certain lockdown measures as a new wave of Covid cases and deaths climb. Energy demand could diminish as these countries re-enter lockdowns. Decreased energy demand in Europe reduces incentives for the UK to export to Europe, which in turn lowers prices in the UK.
Warmer winter temperatures could cap some of the rises currently evident in the UK gas and power market. If demand falls below seasonal norms, drops in gas prices are likely outcomes.
What can your business do heading into the new year?
Procure the right contract type at the right time
If you are looking to procure a new contract in or after April 2022, pursuing a flexible contract is a viable option. Moving into the spring months mean less demand for heating.
Ramnikh Kular, Energy Trader at Northern Gas and Power, notes that “The market could be ‘overvalued’ at this point, and, conditionally, a warmer winter will significantly reduce energy prices from April 2022 onwards.”
Latif Faiyaz, Head of Flexible Purchasing at Northern Gas and Power, added: “This gives you the option to sell back your energy and then rebuy it at a lower rate when the market does eventually fall.”
If you are needing to procure sooner (between December 2021 and March 2022), opting for a long-term fixed contract will help reduce prices. This method of power purchasing is known as “cost averaging”.
“If you take a three- or five-year deal,” says Latif Faiyaz, “the average unit rate you’ll pay will be significantly lower than that of a one-year deal.”
Monitor your energy consumption and waste
Businesses right now can reduce their energy bills through energy management and monitoring.
Energy management is the process of monitoring, controlling, and optimising energy in a building, site, or organisation to satisfy both economic and environmental requirements.
“Businesses have the opportunity to identify where their energy is being consumed with advanced energy monitoring systems,” says Latif Faiyaz. “These can spot inefficiencies in seconds which businesses can address immediately, making significant savings in the long run.”
The hardware and software technology of an energy management system (EMS) solution allows businesses to visually see through data-rich and easy-to-use graphs and reports exactly how much energy their business is using and losing.
One of the easiest ways to reduce energy cost is to optimise the way in which it’s already used. Businesses can become more efficient by reducing energy consumption – switching off lights and charging points, PCs and equipment, or using energy-intensive machinery only when required.
Stay current on energy trends via Market Insights
Businesses may stay up to date on energy market news and commodity prices through our Market Insights portal.
Our digestible, comprehensive market reports are published daily and give businesses valuable insights they need to act quickly and advantageously. Market Insights provides power and gas prices (including spot, day-, month-, and year-ahead pricing), market trends, storage level reports, carbon prices, and industry insights via vlogs and news content.
If you have any further questions about business energy contracts or if you want to identify opportunities to save energy in 2022 and beyond, give us a call on +44 (0)3 300 300 800.