How Price Volatility in the Energy Market Can Affect Your Business
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Last updated: 20 May 2020
The energy market is incredibly volatile, with prices fluctuating daily. If you want to find a cheap energy deal
for your business, it’s important that you understand the options available to you, and how your business can be directly affected by price volatility in the energy market.
The reason that the market is volatile is that energy is a traded commodity, so traders will try to predict what’s going to happen in the market so that they can raise their prices. Supply and demand dictates price, and this can vary a lot. For example, in the particularly cold winter of 2012, there was a surge in demand, so prices went up. Other issues also come into play too, for instance the ongoing conflict in Syria and Iran, countries where we source a lot of our oil from.
What Do I Need to Watch Out For?
Prices in the energy market are largely driven by wholesale costs. And the wholesale cost of gas and electricity is further driven by commodity costs such as that of oil, which can be extremely volatile.
The wholesale costs of energy can also be affected by external factors such as the weather. Bad weather not only impacts demand for energy, but also supply. For example, a prolonged period of cold or gloomy weather will affect the production and supply of renewable energy from solar or wind farms, while at the same time demand is pushed up because people need more energy to light and heat their homes. The increase in demand coupled with restrictions on supply means that bad weather can often increase the price of gas and electricity.
As the UK’s energy mix is changing, wholesale prices could become even more volatile, partly due to the charging structure for ‘cash out’ prices. This is the cost that the National Grid has to pay for balancing electricity demand, which they need to recoup via energy sales.
The increase in low carbon generation might also depress prices across all of the wholesale electricity market. The government is continuing to subsidise low carbon generators, and these plants have an incentive to bid low to generate as much energy as possible, which will keep prices down. However, while wholesale electricity is likely going to get cheaper, the prices that businesses pay for it is set to increase.
The Business Market
Businesses face the greatest exposure to wholesale market movements. And the bigger the business and the more energy it consumes, the more it will be affected by changes. Because of the sheer size of big businesses, energy suppliers
don’t want to be exposed to any variation in their behaviour. This variability might cause them to be short in matching supply with demand, forcing them to purchase energy in the short-term market, which can be very costly.
To prevent this from happening, energy suppliers offer bespoke quotes to businesses, which relates the unit cost offered to the level of the wholesale market. Given that the wholesale electricity cost changes every half hour, the price that is offered to you as a business owner is subject to change until you lock in a specific price for a specific period.
So, the retail price that you’re offered as a business energy customer is subject to the same volatility as the wholesale market in general. This makes it especially difficult to compare business energy deals
, because a good price can come and go in the time it takes to open up your business in the morning.
However, this does give your business a strong opportunity to strike a good deal, given that electricity is priced 48 times a day. If you’re looking to compare business energy
deals and aren’t sure where to start, usave can help.
How Can Renewable Energy Protect My Business From Price Volatility?
More and more businesses are choosing to become ‘prosumers’ by generating their own energy. Renewable energy
isn’t prone to the same volatility as non-renewable energy. This is because it’s procured from sources that can’t run out, like the wind or sunlight. This is especially true if you decide to generate your own energy, as you’re in control of your own supply.
You can even make money back from renewable energy generation. For example, if you install solar panels to generate power for your business, any excess energy can be sold back to the National Grid. This works via Feed in Tariffs which provide small-scale energy producers with monetary rewards for the electricity that they generate, even if they’re using it for themselves. Power Purchase Agreements reward customers based on how much energy they export back to the grid.
Instead of dealing with an energy supplier, as a prosumer you can look for an energy partner to help you make the most of your electricity. For example, Haven Power offer co-creation workshops. These help customers to work out what help they need in getting the most from their renewable power. Haven Power have previously aided their ‘prosumer’ partners through strategies like demand side response, power purchase agreements, risk management, budget forecasting and energy audits.
Even if you can’t afford to generate your own renewable power, choosing an energy supplier that sources their gas and electricity from renewable sources could also partially shield you from price volatility. Cutting down your business’ energy usage is also a smart way to protect yourself from the market. Smaller costs mean smaller fluctuations in your potential bill.