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Keep calm and carry on

How best to address the current energy market turbulence?

22nd September 2021

One of the advantages of a corporate history stretching back 53 years is that we have seen most things before.

The current energy market turbulence and associated price surge are certainly hitting the headlines and causing boardroom angst. But the experience of dealing with the impact of middle east wars in the ’70s, miners’ strikes in the ’80s, market deregulation in the ’90s and the 2008 financial crash helps to give our team perspective; and most importantly the experience to navigate the best path ahead for our clients.

What next?

For those organisations that are fortunate enough to have recently renewed their energy contracts or have a contract stretching towards 2023, then the best advice is obviously to steer clear of the current market, but take action to be ready to take advantage when prices fall. However, those that have a pressing October 2021 contract renewal, through to those renewing in the next major contract around April 22, do not have the luxury of an option of inaction.

Many organisations will be having to deal with at best having broken their budget or at worst major pressure on their profitability. However, we don’t see the market pressure abating quickly and doing nothing to secure a market position may well just see things get worse. The rabbit frozen in the car headlights doesn’t tend to end well. Even those organisations seeking to act may be struggling to secure offers from suppliers. Many have tightened up credit assessments or are being more selective about what business they quote, and some are simply not quoting for new contracts at all. Over the last week, our team have heard several potential clients say, “I just don’t know what to do”. We would venture to suggest that this is the time when a trusted advisor really can help.

Doing nothing is not an option

So, what are we advising clients to do? Now nobody likes a “Smart Alec” but back in April 2020, we were strongly advising organisations to forward buy at market lows for several years, protecting them against current prices and providing significant price benefit. As a point of illustration, many clients following this strategy in April secured a price around £40/ MWh versus the current market price of £140 / MWh. For those organisations not in that fortunate position, we are now being asked to help guide them through the immediate price challenge. However, we are also advising them to not overlook getting a better longer-term plan in place that will enable them to enjoy the benefits, as and when the market starts to rebalance.

Despite the urgency of the situation, cool heads do need to be to the fore. Do take the time to understand the precise challenges that current prices are giving your business and then we work through the potential solutions that best manage the challenge. The important thing is to stop the situation from getting worse but also deploy a solution that allows you to take advantage later if prices improve. However bad the position is today, we remain confident that the energy market is cyclical over 4 to 5 years. Therefore, the focus is on putting a strategy in place that protects you from current market uncertainty but also optimises your future prices.

Use Less

The immediate focus will inevitably be on managing the current impact of rising prices. However, the truism remains the case that “The cheapest, greenest energy is the energy you don’t use.” Do take the time to look afresh at energy efficiency initiatives. The payback period on projects that your Board wasn’t minded to approve last year just got a lot better. The silver lining is that the current turbulence may actually help to focus attention on the benefit of your carbon net-zero and broader sustainability strategy.

Dealing with supplier uncertainty

Many of the early queries that our team have fielded in recent days have related to supplier stability and the potential impact of any subsequent failure. The news this week has referenced the likelihood of a significant narrowing of the supplier base as smaller suppliers fail – we would share the view that this is the likely outcome. However, the suppliers likely to fail are those that do not have their own generation assets / sufficient financial backing / adequate hedging strategy of expected consumption; Inenco and its clients have very limited exposure to these suppliers.

The benefit of a 53-year history and highly experienced Procurement Team is that we have witnessed several rounds of supply base contraction over time and have learned from these experiences. This history reinforces the value of a rigorous supplier selection process that helps to protect clients and mitigate the associated risk.

Stuart Lea, Head of Procurement Services

To find out more about how Inenco can help please contact us on 01253 785 294