Over the last couple of years we have seen huge volatility in the energy market. Back in 2020 we saw the markets down at £45-£50 per MWh (4.5p/kWh – 5p/kWh) for electricity, 30p-50p/Therm (1-2p/kWh) for gas and everything was good in the world. All of a sudden markets changed and we have had record highs, huge volatility, dramatic cost increases and government support but what is next?
The truth is no one knows. You can make assumptions, analyse the market but the market can change at any moment. We are seeing that any negative news is exaggerated and will cause the market to move not by £1 or £2 but by £10s of pounds and will take a few weeks to come back if we are lucky before we need to take delivery. We are seeing new low levels of sub £100/MWh for electricity and around 4p/kWh for gas for the commodity for summer prices. However, winter prices are still over £110/MWh and the volatility is still there. Picking the wrong day to go to market can possibly cost 2p/kWh or more than previous days, weeks or months.
What can you do about this?
Complacency has kicked in, people are accepting the higher prices to fix the market using the phrase “Well, it is cheaper than last year.” Although this is correct, is it right to pay 3x more than what you used to pay and settle for something that may not be where you wanted it to be with no control of how you can get a better price?
There are ways to manage this. The word ‘flexible’ has a tendency to put the fear of God into many people. Let us look at this in a different way. If you had a flexible contract and purchased 100% of your commodity and 100% of your non-commodity is that not the same as a fixed price contract which is exactly 100% of both the commodity and non-commodity bought at the same time?
Furthermore in a world that we live in today people are asking for transparency, a flexible contract bill is far more transparent than a fixed price bill, breaking down a lot of the charges that you would not have seen before. This is nothing to be scared of but more to be informed and to understand how your electricity bill and charges are made up.
When you get a price today what are you comparing this against? If you have been lucky enough to have fixed a contract 3 years ago, your price today bares no resemblance to that price. Likewise if you have a fixed contract that you had placed last year again the prices today are not going to bare any resemblance to those you have from last year.
With a fixed price contract, when you are going to market you are actually comparing the prices of supplier margins at that particular point in time, including any risk premiums and costs of credit along with the non-commodity and commodity. There is nothing wrong with this methodology however it comes at a price, and if the market is particularly volatile you can see high volatility premiums built into prices to cover the time period it takes for you to make a decision.
The flexible option gives you control, the limitation on this is the amount of volume you are using. Volume doesn’t get you a discount it just opens up different products. These thresholds have been coming down over the years however they are still quite high although there are products like baskets that can allow smaller volume clients to be traded in a flexible contract which may not have been an option before. This is due to the wholesale market and the size of trades you can trade not the suppliers.
You can put a flexible contract in place, which enables you to have a delivery mechanism to get the energy (gas/electricity) to you but not buy until the market is right to do so. You also don’t have to buy it all in one go, you can spread the risk by buying many times over a period of time rather than putting all your eggs in 1 basket and purchasing 100% in 1 purchase like a fixed price contract reducing the risk of going to market at the wrong time. There are many different strategies out there to buy your energy. If you are not confident or feel like you don’t have the skills to do it yourself, engage a TPI who can offer such strategies and help you understand the market and what is available to you.
Make sure you understand what the TPI is offering and if the strategy is right for your business. There are no stupid questions, if you do not understand what you are being offered, it may not be right for your business as it will not sit comfortably with you. Having a knowledge on how the market can work can benefit your organisation. The energy market is not witchcraft and anyone who is dressing it up to be that may be not the right energy consultant/energy broker/third party intermediary (TPI) to work with. There is a lot of value in implementing a purchasing strategy that is right for your business.
Remember there is no right or wrong way to buy energy – it is what is right for your business!
Flexible gives you your cake and you can eat it, but to get full advantage of a flexible contract you need to put it in place long before your contract is due to start – I would suggest 12 to 18 months in advance, to allow for strategy discussions and the market to reveal itself.
There are prices 2 and 3 years in the future that may be worth taking from time to time, not 100% but may be 5-10%. It is an interesting time in the energy markets at present, the volatility is not going away and prices can move up and down with large costs and savings involved to you as a business.
As the Boy Scouts motto says “ Be Prepared”! No one knows what the future may bring but we can all say one thing we will need energy to run our businesses, the question is at what cost and if we see a market like last year will my business survive?
If your business is due to renew the energy contracts next year, start looking now to gage where the market is and where it could go. What price do you want to achieve? Get good advice and information on the energy market. Help yourself to get better energy prices by giving yourself a chance.
If you want to discuss your energy requirements with a TPI, we at Flagship Energy work with some great people up and down the country and would be glad to put you in touch with one of them. Please email Tom@flagshipenergy.co.uk , matt@flagshipenergy.co.uk or stuart@flagshipenergy.co.uk if you want to be connected to one of the TPIs.
