What Has Caused the Spike in Energy Costs?

The commercial sector is set for yet another shake-up as energy costs continue to rise. This is obviously going to have a huge impact on business, especially in the wake of the recent Covid pandemic, with some businesses potentially seeing an annual increase of up to 70% on previous years. We’ve been taking a look at the drivers for this upward market movement and the resulting hike in costs.

Demand, Demand, Demand!

The gas storage levels in Europe and Asia are at their lowest point for years (circa 80% of that at the same time last year). Traditionally this would not be an issue, but a harsh and long winter in 2020/21 have meant both regions have suffered, ultimately raising concerns over supply security.  

Unfortunately, the planned maintenance of gas fields has also overrun, adding yet another layer of complexity. With production decreasing and maintenance overrunning, the gas fields are at their lowest ebb.

To ensure that there is enough gas available to meet demand over winter, the UK uses a mix of inbound supply (deliveries when needed) and stored volume. Stored volume, usually bought in summer at a lower price, ensures that demand is met.  However, increased demand, coupled with supply remaining low, has meant that we have seen a 250% increase in price for gas this winter.

In a bid to reduce the further impact on electricity contracts (40-50% of electricity is generated by burning gas), the UK has turned to burning coal to counterbalance its reliance on gas-fired power plants.

Carbon

The cost of carbon is a trading scheme designed to reduce emissions. A trading environment open to all, the market has been subject to huge increases, more than doubling in just one year!

Renewables

Unfortunately, renewable energy sources such as wind and solar power have been delivering less than expected. To make up for the difference, battery systems or small generators must be used. Whilst they meet an immediate need, it’s a costly alternative to traditional generation methods.

Recovering Losses

Life in lockdown created its own set of challenges for both energy suppliers and generators. Suppliers, who normally book energy for months in advance, suddenly found themselves with a surplus of energy. On top of this, non-commodity costs (necessary costs that would normally be covered in billing) still had to be paid, despite the reduced consumption.

Infrastructure

The UK relies on imported power. Unfortunately, unexpected outages in Europe, have reduced their capacity to export. On top of this, a fire last year at the connection point in the UK (Kent) to the National Grid, has meant that the connection is out of service. With full connectivity not expected to be back until April of this year, pressure is mounting to find alternative energy sources.

Compounded Failings

Alarm bells were raised late last year, when:

1) a company that provides natural gas to utilities withdrew from the market
2) it became apparent that some suppliers had not purchased enough fuel for their client

This gap in the market meant that customers had to be picked up by alternative suppliers. Unfortunately, the sudden need to purchase high volumes of energy, to cope with the growing demand, led to inevitable price rises.

The Often Unseen Costs

The industry’s problem is getting worse. With more failed suppliers, the cost of smearing the fees across all remaining companies has become an uphill battle for both parties involved in the mutualization effort. But it’s not just small companies that are feeling the pain. Some large suppliers have mutualisation bills based on their market share for failed suppliers’ levies too – meaning they now need to cover these costs as well!

In Conclusion

In normal circumstances, we would have expected to see a drop in the wholesale market in summer, as our increased renewable energy, and fully stocked gas storage eases things down. However, with the energy market in such turmoil, it’s difficult to predict.

If we had to put a wager on it, we would predict that as we progress through winter, the market will only get worse in the short term.