The Energy Markets, Why they are so high.

In this article Dukefield Energy CEO Nick Gauntlett provides insight into the current energy market situation, the cause of the problems and what we are advising customers do.

The cause of the problem

In short, there are multiple factors that affect the market, these have all hit at once creating a perfect storm. A lot of the factors involve gas, European gas storage taking us into the next winter was low throughout the summer. The UK has only a small demand for storage, however, Europe rely on it. There is regulation in France that forces suppliers to have storage sites full before winter, this resulted in increased gas demand over the summer and pushed up curve prices.

Liquified Natural Gas (LNG) cargoes are heading east at a premium price rather than to Europe to satisfy demand where no other option is available. Additionally, Norway have chosen this summer to carry out extensive and needed maintenance on their fields which means reduced supplies to the UK and Europe.

The Russians are refusing to transport gas through the existing pipeline that crosses the Ukraine into Europe in the hope that they can use the new Nord Stream 2 pipeline which crosses the Baltic avoiding borders. Nord Stream 2 is ready and just needs approval from Europe, the current market situation results in more pressure to speed it up approval.

The UK also had more outages at gas fired power stations, the wind didn’t blow like it should, the sun didn’t shine like it could and we had a fire which has shut down an electricity interconnector with France. So, demand is higher than supply, this means traders must buy and anybody with spare energy can charge a premium. Markets can move up on a tiny volume of trading, but they don’t come down without a significant market signal. If all the news is bad, the price keeps going up.

To be able to trade, suppliers need to create a line of credit with a trading platform. This allows them to purchase energy from sellers on the platform and fulfil their supply/demand balancing requirements. As the price of energy goes up, suppliers will be requested to add funds to their credit line. Once the supplier runs out of money, it’s over, the supplier is forced to buy their energy at market prices through the imbalance process, they can’t pay the debt and OFGEM removes their licence.

Most suppliers will hedge their demand by buying the energy at the price they sell it to the customer and will add a small margin to cover costs and create a profit. This is sensible if the supplier has the cash and could potentially make money for the supplier. To follow this strategy the supplier needs a lot of cash. Suppliers with limited cash are running out and seriously at risk. Therefore, to survive a supplier needs very deep pockets, or an integrated ‘hedge’ such as a couple of power stations or access to their own gas supply. The retail side of the business might lose money, but the generation part will make money, reducing the exposure overall. Ironically, the more successful the supplier is, the more cash they need to cover the risk.

If a supplier hedges ‘100%’ of demand and the customers under consume, the supplier will be deemed to have sold the surplus back to the market and if the sell price is above the hedge price, they make money. However, if the sell price is lower than the hedge price the supplier loses money.

There is some good news, European storage is filling at a good rate and as it fills the pressure in the store means less can be injected, so daily demand is reduced. It’s probably going to get windier which means Norwegian gas flows will increase, and all this should help push prices down. The biggest influencing factor we need is for European approval of Nord Stream 2 to allow the Russian gas supply onto the continent which should return prices to ‘normal’.

The Utilities Supplies and Services Framework Suppliers

All the Suppliers on the framework are heavily vetted and credit checked. We do everything we can to ensure we have confidence that they can withstand any market disruption. Currently, it is domestic rather than commercial suppliers that are going out of business or having serious financial issues.

What to do

We are advising any customers with contract renewal dates in early 2022 or later to just wait. The markets are extremely high right now and you do not need to sign anything as you have time on your side. Any TPI advising organisations with 2022 renewal dates to sign now are not thinking of what is best for the customer.

Customers with end dates in 2021 will need to do something, the Dukefield Energy team are looking at the markets daily and will work out the best plan for each customer. This maybe a short-term contract to get through this high period or depending on the customer portfolio, a flex/ blend and extend contract taking advantage of a dropping market.

The most important thing to do is not panic or read too much into what the mainstream media are saying. If you have any questions at all, please contact the team at Dukefield Energy and we can talk you through all the options.

Email: info@dukefieldenergy.co.uk

Phone: 0345 4022 461