Winter-21: A Paradigm Shift in Energy Markets

“Unprecedented” was a deservedly much-overused word during 2020 as the global pandemic took hold and put everyday life (as we knew it) on hold. In the energy industry, however, 2021 certainly now deserves to continue that moniker, as prices for gas, electricity and carbon continue to rise relentlessly.

The next few months in the energy industry look volatile at best; at worst they could lead to serious economic harm.To call the current prices a “spike” would be to underplay the fundamental reasons that have given rise to the wholesale gas and power markets across Europe. Instead, what we have is a fundamental (or paradigm) shift in prices, signalled not by a single event, but rather by a combination of factors in a perfect storm of volatility.

The government, for their part, have done their best to reassure the public that the lights will remain on, and gas will continue to heat our homes this coming winter. So far, so true, but the missing piece of the picture is that the energy will not be supplied cheaply. Uncertainties surrounding gas and power supplies into and within Europe, around renewable generation levels, and around carbon prices have combined to create a dangerous mix of bullish factors that will leave customers and suppliers alike exposed.

Customer behaviour

Faced with record high prices, there are signs that end user demand is beginning to fracture. Gas usage amongst the heavy industrials has fallen due to gas price exposure, with operations such as fertiliser production no longer cost effective at these prices. The loss of CO2 supply, a biproduct of the fertiliser industry, will have a knock-on effect on other industries, particularly the food and drink industry where the gas is used for packaging and carbonation.
If this knock-on effect feeds down through the economic supply chain, we may start to see further demand reduction as wider industries are forced to turn down.

Supplier risk

2020-21 has already seen several energy supplier failures; the high wholesale prices have seen suppliers unable to meet their client promises, with prices well above the government-imposed price cap for domestic users. This trend for failures amongst smaller, independent suppliers looks set to continue as prices escalate; only the larger suppliers, with upstream activity to offset the high wholesale prices, look set to weather the storm.

Outlook

Our view is that the current high prices are not set to be short-lived; as the peak demand period of Q1-22 approaches, along with all the risks that cold weather can bring, it can be expected that prices will attract further risk premium ahead of delivery. A mild, windy winter however could bring some relief should it materialise, and if prices are to fall, perhaps the late winter period would be the place to look for an opportunity. However, with all that is going on, to wait would entail far more risk than many customers will be able to tolerate, and things are likely to get worse before they get better.

Failed Customers

Many end users will be anxious about what happens if their energy supplier is one of those that fails. In these circumstances, Ofgem has processes and procedures to ensure that the customer account is picked up by another supplier, called a Supplier of Last Resort (SOLR).

The SOLR has an obligation to communicate with the client to let them know that they are the new supplier, and the rates at which the energy will be delivered. There is, however, no obligation for the incoming supplier to honour existing terms, leaving customers with the prospect of a price hike.

The SOLR will also pick up any credit balances that the customer holds with their failed supplier; this money is guaranteed, so will not disappear with the supplier.

Consultus will look at the costs offered by the supplier and to source alternative prices; the customer is free to switch away from the SOLR, so effectively a tender can be carried out to find the most competitive rates for the client. We carry out due diligence on our suppliers too, to avoid a repeat pattern emerging.

Throughout the process it is our imperative to provide peace of mind and the best solution available to the customer.

 

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