Updated 01 August 2022
As in previous years, the main contract round in the year for fixed price energy contract renewals is in October. Other than those amongst us who recently returned from an excursion to Mars, most people can’t have failed to have noted that energy prices are currently significantly higher than those we grew accustomed to in recent years. Our experts have identified some key pressures that unfortunately mean that the position may not improve anytime soon.
Prices are now extremely high and volatile. It is difficult to anticipate what will happen, as unpredictable geopolitical events are driving the market. What we can see is that prices are extremely high and have continued to move higher.
Winter ‘22 gas prices hit fresh highs in July due to further Russian gas flow cuts. Flows through Nord Stream 1 have been at 40% capacity due to repair difficulties, blamed on sanctions. Now the turbine needed to repair the Nord Stream 1 pipeline is finally on the way back to Russia, there is allegedly a problem with a second turbine, so gas is flowing at 20% capacity.
This appears to be market manipulation in response to sanctions, so we expect more of the same and there have also been noises about problems with other units. With Russian gas flows reduced this will further impact the ability to fill EU gas storage ahead of winter, which can only add to market pressure in the lead-up.
In a triumph of wishful thinking over experience, we are finding that some organisations are still planning to leave their supply contract renewals until late in the window, in the hope that prices will fall.
However, prices have increased this summer, and unfortunately there is no current sign or expectation that they will fall anytime soon. There is even a risk that prices could rise further as we go into the autumn. Indeed, we have already seen a significant spike in prices in June and July. It has not been unusual in previous years to see price spikes in September; due both to buying pressure when there are a lot of clients that have left contracting late and also if there is gas system maintenance which consequently restricts the flow of gas into the UK. Both these dynamics are in play for September’22.
Added to the mix this year is the financial stress on suppliers which means that they are being very selective about what business they are prepared to quote for; and if they do opt to quote the process takes a lot longer, as a result of more complex and rigorous credit and risk assessments.
So, by leaving contracting late not only do you expose yourself to the risk of a September spike, but there is also a risk of failing to contract in time and facing the penalty of even higher “out of contract” rates being applied.
For these reasons, we would strongly recommend contracting earlier within the window, than later.
Despite the price protection that many of our clients have benefitted from, it is inevitable that at some time they will be impacted by current market prices. It will be important to understand when this impact will land and by how much. Your organisation will also need to ensure that you are consuming within the contract allowances and are aware of other potential price risks. Our advice is to agree and actively pursue the best strategy to deal with this unprecedented challenge. Leaving your organisation exposed to the current market is not working; prices are getting higher, and the problem is getting worse.
We are also seeing volatility and increased prices, in several charge lines – especially those with either a direct, or indirect link to the commodity price. Unfortunately, a lot of these price changes are only announced just before the supply period is due to start when the supplier provides the billing rates. The major areas that are likely to have a further impact are:
We referenced earlier that suppliers are facing significant financial stresses. This has led many of them to apply contract terms that they haven’t ordinarily applied. Forms of these terms are in all supply contracts and there is potentially a significant financial consequence when they are applied. The main areas to monitor closely are:
We realise that this is a complex area, but we remain confident that having helped customers navigate the impact of the Middle East War in the 70s, the coal strike in the 80s, market de-regulation in the 90s and the global recession in the 00s; our team of experts have the insight and experience to help.