Having reviewed the 2014 summer outlook on energy prices in the last Market Report, we see that, when it comes to energy procurement, the most crucial question for UK businesses is – when to agree on an energy contract to benefit from the most optimum energy prices.
Energy wholesale prices are a two year low, making it tempting to take immediate advantage of the market dip. Technical market analysis and fundamental drivers show potential for further drops in prices (on the back of lower demand and a comfortable gas storage situation across Europe).
On the other hand, uncertainty around Ukrainian and Russian borders may trigger an increase in energy wholesale prices. The UK imports a vast majority of its energy, so geopolitical events have a significant impact on the country’s energy market direction.
Businesses, therefore, face a dilemma – to take a gamble and hope prices are good enough today or hold off and potentially benefit from lower costs tomorrow. The latter may save capital for your business. Yet all these prospective savings could be lostduring the next spike generated by Russian or Western political decisions.
A potential solution to benefit from market conditions and mitigate risk would be:
- Step One: Sign a flexible purchasing agreement.
- Step Two: Secure part of the costs – hence reducing risk. If you secure 50% of the price, the fluctuations only affect the remaining 50%!
- Step Three: Define the level of cost increase you can handle (from today’s level). This will help you understand what percentage you should secure and what percentage you should let float on the market. For instance, Commodity accounts for 60% of electricity costs so if the market increases by 10% – you only face a 6% increase (given that third party costs can typically be fixed). If we secure 50%, we now reduce the overall impact from 6% to 3%. Having reduced the risk you can then float the remaining volume. This scenario allows your business to take advantage of lower energy costs should prices improve, whilst protecting the upside.
