Why are energy prices rising: is this the new normal?

19 May 2022

Why are energy prices rising: is this the new normal?

What's happening in the UK power markets? How can businesses manage the impact of higher prices and increased volatility?

On 9 September 2021 we thought electricity prices had reached an all-time high, but by Wednesday 15 September they had surged even higher. On this momentous date they reached the day-ahead wholesale price of £2,500 per MWh – to overtake the previous day’s record-breaking peak of £1,750. The price of wholesale gas has also been behind energy prices rising with an increase of 250% since the beginning of the year and by 70% since August.

Of course, this all adds up to higher bills for many businesses, with a few manufacturers already taking drastic action by pausing or limiting production. With energy prices rising its never been more important to review your energy supply agreement and ensure you are on the best contract for your business needs.

Why are energy prices rising?

What has caused the UK's bullish power market? Is this a rare oddity, or a sign of things to come? How can National Grid keep the system balanced and what are the opportunities for business?

Higher energy demand from global economies that are bouncing back after COVID restrictions, together with increasing environmental concerns, are pushing up gas and carbon costs. But on top of these bullish factors, the first two weeks of September brought a 'perfect storm' of other extreme market pressures to the UK. Unseasonably low wind, combined with planned power plant outages for prewinter maintenance (totalling 17GW of capacity) made supply extremely tight. This was exacerbated by interconnector constraints, including an outage, due to fire, of a major power import pipeline from France.

What's next for energy prices?

While it's impossible to predict the future of the energy market, which is inherently volatile, most forecasters expect increasing volatility. One of the key drivers is the rapid replacement of fossil fuel generation with intermittent renewables, together with increasing power demands due to the electrification of both heat and transport.

In the immediate future, many of the plants that have undergone planned maintenance will return to availability. And over winter, breezy conditions should return to provide a significant increase in wind generation. The new North Sea Link will also open this year, providing a two-way 1.4 GW renewable power supply between Norway and the UK.

Nevertheless, similar low wind issues in interconnected countries could mean that some of these vital pipelines experience further supply shortages due to a lack of back up capacity. In addition, colder weather and darker days and nights will increase UK peak energy demand by at least 15GW over winter.

Future outlook

Going forward, strong competition from rebounding global economies for gas (which remains the biggest single source of UK power generation) could maintain upward pressure on prices. This situation is aggravated because some European gas storage facilities are already depleted after a cold winter in the northern hemisphere.

Looking further ahead, the UK's coal power stations are to be phased out by 2024, gas power station capacity is reducing, while nuclear provision has declined sharply and faces an uncertain future.

As part of its commitment to generate emission-free electricity by 2050, the government aims to deliver 40GW of offshore wind by 2030. But replacing stable, predictable fossil fuel power stations (that provide system inertia) with intermittent renewables requires a fully flexible energy system that can balance supply and demand at all times.

What actions can businesses take with energy prices rising?

With energy prices rising it's a good moment to take stock. Explore where you can invest in energy cost savings in your organization and understand how these solutions and efficiencies can both lower emissions and create energy security in times of volatility.

"The energy market has been incredibly volatile in the past 6-8 months. It's vital businesses work with an energy provider who understands the market and can support their immediate or longer term energy strategy" – Phil Manock, Head of Centrica Business Solutions Enterprise Growth.

Make the start that is right for you and your budget. It could be small or large, but act today. Small steps today can make a big difference in the short and long term. Raise awareness among your employees and shareholders about why acting on energy now future-proofs your organisation.

How we can help

Having a proposition that is based upon immediate and future energy market conditions, can have real benefits. Our new Step product provides two pricing periods that provide the reassurance of a fixed period for contracts starting up to 1st Dec 2022 and the guarantee of a second, lower fixed rate from 31 March 2023 until the end of your contract. You'll also benefit from Zero Carbon electricity as standard. Get in contact with us today to learn more.

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