Increased volatility within the short-term and long-term energy markets can affect UK prices. Joe Warren, Co-Founder and Director, ZTP offers advice to facilities decision-makers on how digitisation could help them manage energy, maximising savings on their energy use and costs
There are many factors which will contribute to fluctuating energy prices; but it is best explained by looking at where the energy is being generated from, and how much we rely on imports to satisfy immediate demand. There has of course, been a significant increase in renewable energy, as shown below, taken from the Digest of UK Renewable Energy Statistics produced by the Government, which is also expected to rise further as we move to a low carbon economy.
This is great news in terms of sustainability and the security of supply due to a reduced dependence on imports; but the supply itself is more volatile. If there is minimal sunshine and wind, the energy being generated and fed into the national grid will be severely affected. At times with minimal supply and high demand prices will be inflated. On a more positive note, the opposite may be true. There may be very high generation from renewable sources with average or low demand on the grid. In such cases the short term price of power will most likely be extremely low and possibly even negative if there is a need to take the power off the grid. This was seen in the UK on 14th January 2018. Wind output was extremely high and as it was early on a Sunday morning, the generation outstripped the demand, so prices fell into negative territory as the grid needed to be balanced by shutting off turbines and moving the power off the grid.
This inflexibility of renewables is not the only driver behind more volatile pricing. Another major contributor is the closure of Centrica’s Rough Facility. Historically Rough acted as a backup to the UK demand for Gas by storing up to nine days’ worth of Gas at any one point. Due to the high availability of LNG (Liquified Natural Gas) from all over the world at comparatively cheap prices, it was decided by Centrica to close the site rather than upgrade/renew it. Although there is debate surrounding the overall impact this has had/is having on pricing and supply security, one thing that has certainly prevailed is an increase in volatility of the movement of daily Gas prices.
HOW DOES THIS AFFECT THE END CONSUMER?
For those purchasing “flexibly”, the key is in understanding data. The pressure on an energy purchaser has now increased significantly as markets may move extremely quickly. It is therefore vital that access to current pricing is available, as well as the ability to monitor it over extended periods of time. On top of receiving the data, the consumer must have a knowledge of what is driving any change in pricing and work out what the impact is on their business. For example, not only should an assessment of the likely driver behind price changes be considered in terms of the length of time it will continue, but also what is the impact of delivered cost? If Power moves by £1 per MWh – what does that actually mean to the end consumer’s monthly invoice?
This understanding is not just vital for the management of risk when prices are increasing, but also when taking advantage of the opportunities when prices reduce. By having a broader understanding of the impact, it also becomes much easier to communicate with those stakeholders across the business who are not involved with energy purchasing, but are heavily invested. For example, members of the board or a financial director will need to make plans based heavily on the cost associated with, and budgeted for energy. By immediately understanding the delivered cost, decisions can be made far more easily and quicker, which is a necessity when purchasing flexibly in a volatile market.
Digitisation of data is essential to allow those responsible for purchasing their company’s energy to have the best possible chance of mitigating their risk and taking advantage of the opportunity that a volatile market will bring. Time cannot be spent gathering data to assess the impact of any price or consumption fluctuation, it must be available instantly to enable sensible and well thought out decisions to be made. This can then lead on to risk forecasting and strategy…
RISK MODELLING AND STRATEGIC PURCHASING
With the data available for both consumption and pricing, the ultimate goal is to work out the best purchasing strategy that fits in with the appetite for risk and maximising opportunity. The million dollar question is always “what is a good price?” Different consumers will have different answers depending on what needs to be achieved when setting out their purchasing strategy. For some, the key is minimum risk with the acceptance that locking in large proportions if not all energy, may result in a higher average price, but it does allow budget certainty. For others, there is a greater need to drive down pricing and take advantage of opportunities when they present themselves to ensure market competitiveness.
Wherever an organisation sits on this spectrum, choosing a strategy that reflects their aspiration is vital. Doing nothing, leaving to run to spot, is a decision, but is increasingly risky in a tight supply market.
To help guide a strategy – not only must the appetite for risk be assessed, but also the future prices modelled/market sentiment understood. It is very true that no-one can predict the future, however even basic risk modelling can help identify the likely price fluctuations and therefore the relevant impact on a business’ bottom line. Again, if this is linked to the digitisation of data, it will allow for very quick decisions and changes to a strategy based on what a model may be showing.
A well evaluated, well informed strategy must be chosen, one that considers internal risk appetite, potential to take advantage of opportunity and market sentiment/forecasts for the future. This is a huge task for an individual to take on without the necessary data, which is why digitisation is a must, by enabling you to take analysis to the next level through modelling price forecasts and even machine learning which helps speed up such forecasts.
Volatility brings both risk and opportunity, winners and losers. The winners will have the most knowledge, access to data and ability to react most quickly… or just be extremely lucky.