Energy Procurement for 2021 and on…

We have now completed the large task of analysing what happened in 2020 and our view of 2021 in our upcoming yearly Annual Report and it was important to let you know the fundamental information in these precarious times. We can now think about energy procurement for 2021 and on…

The demand destruction started nearly a year ago, emanating from Wuhan, Hubei Province, China. The death of a 61-year-old man attributed to an unknown virus on 11th Jan-20 was the start of the cataclysmic epidemic that turned into a global pandemic.

A year ago, today

UK energy prices had been on the decline prior to that, having topped out at record highs around early Sep-18, with only the introduction of a new winter season an upward driver.

Prices then continued to drop as industries and business had to introduce strict restrictions and distancing measures, move online, or shut down completely and national demand for gas and electricity fell away. On average, energy suppliers were supplying over 30% less consumption due to the “lockdowns”.

This came amid less requirements for global crude as travel, manufacturing, and industrial needs were much less, forcing European oil prices down to their lowest in 15 years while American rates went negative – you had to pay to give it away! Tankers loaded with the black gold were even used as floating storage on the seven seas.

Carbon offsets retraced from their former increases as emissions reduced for the first time in many years, and nature began to stretch its wings and legs, venturing into suburban areas.

While we remain in some confusion about the current situation, what is clear is while some industries are thriving and others remain in peril, the fuels that make up the wider energy mix wait for no one.

2021 – An Energy Oddity

Energy recovery has been faster and harder than first anticipated in Jan-21, although was always on the cards for early in the year. Positive outlooks on vaccine rollouts, even the re-introduction of lockdown measures, coincided with winter supply and demand concerns through a cold snap that had seen record UK prices when the icy wind doesn’t blow. This is sometimes known as a `Goldilocks` situation where scenarios align – some hourly time periods in times of stress on the UK grid saw system prices have hit over £1,000/MW.

  • COVID  
  • Brexit
  • A New US President & environmental ideal
  • Crude Oil arrangements with OPEC, allies, and the US
  • New UK Gov’t and Ofgem industry charges and levies

COVID
  • New lockdowns across major developed countries
  • Differing UK vaccines, and coordinated vaccination programs across home nations
Brexit
  • Altered trading markets, including energy
  • New UK emission carbon schemes
  • FX rates – will leaving the bloc impact the strength of the pound? Carbon and European coal are bought and sold in euros
POTUS
  • Biden’s outlook on US shale and environmental impacts
  • The US reached the peak of global oil production before negative prices with an uncertain future for the world’s top producer
Crude Oil
  • Saudi Arabia and some allies have agreed to reduce producing barrels of oil to keep prices where they are
  • This agreement, with Russia producing more, is only in place until the end of 31st Mar-21
  • OPEC+ meet 4th Mar-21 to discuss next steps, but there is a current 99% adherence rate among members
LNG
  • Formerly a reliable source of UK gas, the country could struggle to attract vessels in Q121
  • Asian spot prices have increased by a factor of ten as their winter has hit hard and nuclear power underperforming
Non-Commodity Costs

Ofgem have enforced new non-commodity costs into the UK industry:

  • Ofgem have new non-commodity costs into the UK industry:
  • The Targeted Charging Review (TCR) – these may now be factored into energy prices but it is best to check with your consultant or supplier
  • Market Wide Half Hourly Settlement (MHH) – reminiscent of p272 NNH to HH, which came in 2017 and still causing issues

As we almost always prepare for higher energy prices in the colder winter months, there is no guarantee based on the above that they may come down anytime soon after that, even if a new normal includes businesses returning after COVID cases start to fall. Consumption i.e. demand would increase, and therefore prices.

We can already see carbon credits become a sought-after commodity leading up to the EU compliance deadline in April as they jumped 6% this week, and provide support to electricity costs.

If lockdown restrictions ease around Easter or into the summer as the vaccine takes, demand recovery and consumption increases should filter through into energy prices. Even without the pressure of the pandemic, prices have been known to trend upwards during the summer months, which happened as recently as 2016, 2018 & 2020. Although the start of the second half of the year may see prices come off, they would already have risen considerably before this point.

Summary

2020 was a mercurial year that saw most other energy commodities trend down in the summer and bounce back in the winter, but UK wholesale prices still increased overall. Continued risk (COVID, Brexit, US elections and policy etc), with the underlying hope that things will return to ‘normal’ means that 2021 has had a volatile start.


Electricity

Electricity AnnualsPrice (£/MW)Difference to Apr-21
Apr-2154.83
Oct-2152.25-5%
Apr-2250.38-8%

Gas

Gas AnnualsPrice (p/th)Difference to Apr-21
Apr-2146.10
Oct-2144.65-3%
Apr-2243.10-5%
Oct-2241.65-8%
Apr-2340.23-11%
Oct-2339.73-12%

However, currently, wholesale energy markets are in ‘contango’ which means prices that start way in the future are presently cheaper than right now (see table above).

If your business energy contract starts in 2021 the cost of the wholesale element is higher than contracts starting in two years’ time. So, if you are looking for some security in future prices these can be procured now to try and minimise the impacts of aforementioned risks an allow for longer term budgeting at lower unit rates.

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