Energy procurement has been fraught with risk in the past year, and 2022 looks to remain challenging. Gas and power prices reached all-time highs in 2021 and supported energy prices have continued into the first quarter of 2022. Here’s a summary from our energy experts on what to expect in the energy market for Q1.
What’s happening in the energy market for Q1
The current market conditions have been caused by limited European gas supply, surging regional emissions markets, and an increase in energy demand in the wake of the COVID-19 pandemic.
Wholesale energy power and gas prices saw strong downward moves during the 2021 festive period, however market prices are still very high compared to historic averages. More uncertainty is expected with price fluctuations leading to a more frequent and intense ‘peak and recover’ cycle.
Gas supply from Europe remains variable, with limited Russian exports having added to storage withdrawal demands through Winter. This has led to an increase in costs, as the fuel is critical to regional power balancing efforts. Geopolitical tensions between Russia and Ukraine have exacerbated this, with concerns being raised around the potential for conflict leading to limited Russian gas exports due to sanctions.
Limited French nuclear capacity in 2022 is further impacting the UK marketplace, adding to prolonged and costly gas and carbon-intensive coal fired power generation. This is adding to upside support on emissions markets, with both UK and carbon benchmarks hitting all-time highs in Feb-22.
Rising regional energy demand in the wake of the COVID-19 pandemic and limits on energy supply have driven strong levels of backwardation in both gas and power forward curves. Later dated futures contracts currently sit at strong discounts to e.g., 2022 period contracts, offering some insulation against severe unit rate gains for longer dated fix-term contracts.
When is the right time to buy?
With current energy procurement buying challenges, how can businesses who are looking to renew ensure they’re buying at the right time and getting the best price possible?
It all comes down to timing and getting it wrong can be very costly. For those on a fixed contract looking to renew, it can be tempting to hold out whilst prices are high. However, it may be better to have a contract in place than fall into ‘out of contract’ rates.
Those with a flexible contract may be seeing significant increases to their energy bill. But the market uncertainty risks can be spread out. This enables you to limit budgetary risk whilst taking advantage of lower energy costs if the market drops.
Navigating your business’ energy
It’s a crucial time for any decision making as the cost of fixing at the wrong time could cost your business thousands. How the European gas market reacts to the ongoing regional political tensions will be critical to pricing going forward.
It’s always best to speak to an expert to access the right advice and strategy for your business. Our experts offer a clear view of the market and work to understand your business’ requirements to ensure you’re protected, now and in the future. Why not see how your current strategy holds up and take our procurement score challenge?
Get in touch with our experts on 01772 689250 or email firstname.lastname@example.org.