Record High Gas Prices

Gas Price crisis – Why gas prices are high & what you should know

It is very much headline news that the skyrocketing gas price has the UK and European energy markets in the grips of a crisis.

Wholesale prices had more than tripled this calendar year already, before the crisis really took hold.  But a perfect storm of market conditions have sent the energy industry into a tailspin.

The back-up options for electricity generation historically available, such as coal, have been depleted by environmental policy and the reduction in fossil fuel usage, increasing exposure to gas market volatility.

This leaves the continent reliant on mild weather to make it through winter 2021/22 without further impacts.  Goldman Sachs have even warned of potential blackouts for industrial consumers if the season is colder than usual.

Below we have created a short brief for businesses on what you need to know and where you can go for advice.

What has triggered the crisis?

Demand is often the driver of price increases and could continue to push prices even higher throughout this winter.  Extra demand as a result of the world’s economies driving out of Covid lockdowns has been one factor.

Last year’s cold winter also depleted inventories of gas across Europe, which have not been able to be replaced yet.  Another cold winter in Europe and Asia would pit the continents in direct competition and push prices even higher.

For the UK specifically, renewables have been ineffective recently due to low winds over the summer and the problems have been compounded with a fire at a main interconnector with France, which has now been shut down completely with no news on a date to reopen.

Why is it the gas price affecting electricity?

In 2019, 40.9% of the UK’s electricity was generated by burning gas, whilst renewables reached highs of 36.9% and coal accounted for just 2.1%. (Department for Business, Energy and Industrial Strategy’s UK Energy Statistics 2019 report)

This shows how reliant the country is on gas and how gas wholesale prices have a direct impact on power, too.

Why are suppliers going bust?

Energy suppliers, especially smaller ones, are not always involved in the generation of power.  They do not look after transmission or distribution of energy either, which are handled by Distribution Network Operators (DNOs).

Quite often, an energy supplier’s entire existence is one enormous administration exercise involving the buying and selling of energy to consumers and/or businesses.

They are essentially hedging their bets on buying enough energy at an advantageous rate that can be sold to customers for a profit.  The current sky-high prices of wholesale products are simply making that impossible for some.

What if my business energy supplier goes bust?

There are an increasing number of suppliers ceasing trading, at least smaller ones.  Whilst many smaller suppliers can be attractive to business owners due to their marginally lower prices versus the “big six” in the energy market, they do not have the same ability to weather such financial storms.

Utilitypoint and People’s Energy have both ceased trading over the last two weeks and even the UK’s sixth largest supplier, Bulb, has requested a government bailout.

Energy regulator Ofgem has a well-oiled process in place to redistribute business (and consumer) energy contracts to other suppliers, based on a range of suitability criteria.  The good news is that your supply will not be affected if your supplier goes bust and Ofgem will be in touch within a few days with details of your new supplier.

You do have the ability to switch supplier following this move, which is outlined in your communications from Ofgem.

For Great Annual Savings Group (GAS) customers, we would contact every business individually in the event that a supplier went bust to advise of the next steps and handle a renegotiation of a new contract elsewhere.

At GAS, we work closely with all of our suppliers to ensure the risk of this happening to our customers is minimised.  We hold our suppliers accountable for high standards as much as they do to us, which is in the best interests of our customers.

Which businesses are exposed to the high gas prices the most?

Those who flexi-buy their energy at intervals and in large chunks are at risk from market fluctuations.  These are the highest consumers, such as manufacturers and large-scale production firms, meaning that the current situation will have significantly impacted their cost of production.

What is the government’s plan?

Business Secretary Kwasi Kwarteng has spent the last few days creating contingency measures alongside the country’s leading figures in the gas market.

Early indications are that smaller suppliers will be allowed to go under and their customers will be re-allocated via Ofgem’s usual strategy.

Prime Minister Boris Johnson has moved to quell fears of blackouts.  He said: “I have no doubt that supply issues will be readily addressed.  We’re very confident in our supply chains.  But in the meantime, we will make sure we work with all the gas companies to do whatever we can to keep people’s supplies coming, to make sure they don’t go out of business, and to make sure we get through the current difficult period.”

Conclusion

The main points for businesses in contracts, or waiting for contracts to go live, are as follows:

  • Supplies are safe even if a business’ supplier goes out of business. Their contracts will be moved to another supplier and they will have the chance to switch in this event.
  • Those who flexi-buy energy are in a difficult spot, depending on how they hedged against the current market.
  • Those businesses who are in long-term contracts are in the best position to ride out the current gas price situation, which will hopefully have calmed down by the time their contract is due for renewal. However, it is highly likely that their renewal prices will be much higher than their current deals.
  • If a business has negotiated a contract some time ago and is waiting for it to go live, they have been well advised and renegotiating that contract would be very tricky in the current climate.

 

It is advisable to speak to a business energy expert, a service offered by GAS, if you have any questions about the current gas price crisis or if you are in a place where you must procure energy in this tricky environment.  The best approach is a holistic one, where you can offset price rises in your energy contract with savings in other areas such as water contracts, telecoms, insurance or merchant services.

Great Annual Savings Group offers 12 different cost reduction services, which can help your business save costs and mitigate the impacts of the gas price crisis.

Speak to Great Annual Savings Group for free advice and consultancy around reducing business costs.

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Paul JohnsonGroup Financial Director

Paul Johnson is very much a home-grown talent.

He joined Great Annual Savings Group in its infancy, fresh from a youth career as a professional footballer with Hartlepool United.  He quickly established a reputation within the business and aced all required accountancy qualifications in the space of four years to become the Group’s Management Accountant.

Several successful projects later, Paul was promoted to Head of Finance.  When the former FD left GAS, he took on the mantle of the business’ most senior finance professional; boasting a string of incredible achievements all under the age of 30.

Quote:

“I have witnessed phenomenal growth at the Group over the many years I’ve worked here and I’m looking forward to guiding the Group into an exciting new chapter.”

Interesting fact:

Paul made his professional debut for Hartlepool United against Bournemouth in the Football League.  Some say Danny Ings still resides in his pocket to this day.

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