Annual gas prices hit new records, now over 1,000% higher on last year’s level.
Base-Load Power Prices
Base-load power prices meanwhile have been driven by concern over French and Benelux nuclear plant availability, as aquifers and reservoirs needed for reactor-cooling run dry whilst the extreme drought in many parts of Europe continues.
For the same reason, coal generation capacity will have been threatened by depleting river levels in key European trade canals and waterways not to mention time-lags associated with fixing old or building new plants.
The resulting squeeze in the power market is feeding into gas, as traders foresee utilities urgently turning to gas-fired generation in order to redress the balance, especially with out-of-service nuclear power stations in prospect over months ahead. This has only added to the gas buying frenzy.
Year on Year Price Increases
Renewing Gas Volumes and Electricity Contracts?
A worrying proportion of UK registered businesses are understood to be uncovered, needing to renew their entire forward gas volume soon. Many such firms will be renewing their electricity contracts at the same time.
The traditional ‘Electricity Year’ might not start until 1st April, 2023 but in years gone by, more and more I&C power supplies have been re-aligned to gas.
What this means is that I&C buyers – notably the smaller firms, SMEs or lesser-sophisticated larger users will be re-contracting gas and electricity at seven or eight times the I&C contract prices they secured the same volumes last time around.
Consequently we may se more I&C users averse to the idea of fixing a price now, preferring to ‘ride the market’ out perhaps. Only to discover that no Big Six or other major supplier will currently offer them a ‘tracker price’ contract or ‘buy-on-index’ product whose price will or retrospectively reflect the prompt, say OTC month-ahead, gas or electricity prices prevailing at or near the time of delivery.
The only official or off-the-shelf option available would be the alternative ‘Flexi contract’ which, in certain cases, a supplier may offer. However Flexi contracts can prove significantly more expensive in some instances. They are also far more labour-intensive, they entail additional managerial resources and will typically involve third party intermediaries, brokers and other advisor to be commissioned as well.
In ordinary times (although these obviously aren’t normal times) Flexi contracts involve significant extra market risk, a prospect of higher prices, market or trading risk which has traditionally put buyers off them.
I&C customers that are new to Flexi deals may suddenly find themselves having to monitor the Spot, Prompt, Forward or Futures markets and make trading decisions for themselves, with Flexi contracts requiring them to periodically fix or un-fix prices and volume throughout the contract term.
But ‘trading the OTC’ which is basically what a Flexi contract involves, is and always was a ‘zero sum game’ and one which the producers, utilities, energy merchants, funds and other trading intermediaries generally end up ‘winning’. Flexi contracts were initially marketed as way of ‘giving the customer greater freedom’ and to manage risk. Both of them are still valid. However it remains very easy for an I&C customer to end up paying significantly more for its gas and electricity this way, i.e. looking retrospectively on outturn indices on the OTC.
Notwithstanding the pros and cons, Flexi contracts may simply not be practical, if even available, options for many businesses. Notably micro-businesses, SMEs, smaller commercial and industrial businesses who do not reach arbitrary consumption thresholds for a Flexi contract to apply even the Flexi contract were the preferred new purchasing strategy.
Protection for Sector Users
Whilst domestic sector customers enjoy protection measures under the energy market regulator, Ofgem, none apply to industrial or commercial (I&C) sector users specifically. Unlike domestic customers, I&C customers have no protection by way of ‘price caps’ or other provision.
Ofgem has no legal power in respect of the I&C market, either to regulate suppliers, the bi-lateral market itself or protect customers. Such customers are not covered under Ofgem’s official remit. It has been this way since the outset of competition in the early 90s under the then truly-independent gas and power regulators Ofgas and Offer which later merged into Ofgem in the mid 1990s.
Large industrial and energy-intensive users do command more attention however. They receive various degrees of protection, especially those firms seen to operate in ‘key industries’ or in politically sensitive region. Generally on an unstructured basis, selected large industrials have had the advantage of a ‘listening ear’ in Whitehall, at least to some extent. This is increasingly evidenced of late by the granting of state loan guarantees, government loans, ad hoc support programmes, direct grants amongst and other ‘de facto’ subsidies which aim or serve to cushion the blow of higher energy prices.
The Squeezed Middle
What can businesses do to help their situation?
Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.
This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.
This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.