Energy & Water Market Update – January

Overview

As of the 15th January, Gas and Electricity Year Ahead Wholesale costs show decreases when compared to last month’s report.

Following the assassination of an Iranian general by the US and the counter missile strikes against coalition bases, Oil and subsequently Gas and Electricity prices did increase, but have since eased as the situation has de-escalated. Oil remains at $64 a barrel. An initial trade deal has been signed by China and the US, which may add upward pressure to Oil prices, should this be seen to improve world economic growth forecasts.

As anticipated, the Conservative victory at the general election on the 12th December, had little impact on prices. Labour had been planning a change of direction for Brexit and the energy industry, which would likely have seen a market reaction.

The Gas Wholesale cost is at its lowest level since 2016, as illustrated by our graph. There were almost thirty LNG deliveries in December, with a large number already made this month and more due. These supplies have allowed us to divert Gas into Storage. Russia and Ukraine signed an agreement to continue to transport Gas, with further capacity due to come online mid-2020 via Nord Stream 2.

Electricity Wholesale prices are also at levels last seen in 2016. As Gas prices are lower and provided 35% of our generation in December, this directly impacted on Electricity. We saw a record Wind contribution, replacing more expensive sources. Although Coal supplies a decreasing proportion of our Electricity, it remains an important contributor when demand is high and less reliable Renewables are low. Coal generation is due to end by 2025 as part of our target to reduce carbon emissions, although plants continue to close early, due to not being profitable.

The Met Office forecast for the next month suggests settled conditions, temperatures at seasonal average levels, with some overnight frosts. This should mean a lower Gas heating demand, but in turn, is likely to reduce Wind generation.

What does this mean for me…?

Wholesale prices are extremely competitive. It is advisable to request supplier offers for all 2020 start contracts, for your consideration. Longer term contracts do currently have a premium, but are still showing value. With a greater chance of a cold spell during the winter months, higher demand and a tighter supply / demand relationship, there is always a risk of price volatility in reaction to local of global events.

The influence of higher third-party costs is increasingly noticeable in Electricity contracts. These include, Transportation, Distribution and government policy levies. It is estimated, the Wholesale element makes up in the region of 45% of the Electricity bill and that is excluding the supplier margin, metering and VAT.
Please contact us on 0333 320 0475 to discuss options or to get a latest update.

Gas Market

On the 15th January, the Gas Year Ahead Wholesale cost was 33.65 (p/th), from 36.84 (p/th) in last month’s report and 40% lower than 2019.

A record number of LNG deliveries in December was the main factor for our lower prices. These have continued into January. Should there be an escalation of events in the Middle East, there may be disruption to LNG shipments from Qatar, increasing costs.

Our Gas Storage facilities are roughly 90% full, providing the industry with confidence, which is reflected in prices. Gas demand for Electricity generation was down on the previous month at 35%, and has fallen further so far into January to 27%, due to a greater Wind contribution.

Russia have agreed terms with Ukraine to allow them to continue to transport Gas into Europe and are due to have additional capacity available mid-2020 via Nord Stream 2.

Let us know if you would like us to research your options for 12, 24 and 36 month contracts.

Electricity Market

On the 15th January, the Electricity Year Ahead Wholesale cost was 41.47 (£/MWh), from 44.09 (£/MWh) in last month’s report and 27% lower than 2019.

Wind contributed a record 22% of generation in December. So far in January this is 29%, but with Wind due to ease in the coming weeks, we are likely to revert back to Gas, which had fallen to 35% from yearly high of 48%. More turbines are due to come online, further increasing our Renewable supplies.

Coal is still an important but expensive source of supply, meeting additional demand or shortfalls in other areas, such as Renewables, before the remaining power stations close in 2025. In November and December, it met 4% of demand, whilst in January this has risen to 6%, the highest level in 12 months.

Third Party Charges continue to increase regardless of how the Wholesale element changes, which has been very evident as we look to secure contracts for customers. These charges typically pay for the mechanisms, securing generation at peak periods.

Let us know if you would like us to research your options for 12, 24 and 36 month contracts.

Water Market

Since the 1st April 2017, it is estimated that 1.4 million sites have had the freedom to choose the Retailer for their Water and Wastewater retail services. This became effective in Scotland in 2008.

This means, you can contract your Water services in a similar way to how you already negotiate your Gas and Electricity costs. The local Wholesaler, who provides the Water and takes away your Wastewater, will remain the same, but the key difference is that you will be able to choose the Retailer to handle your meter reading, billing and customer services.

A further significant change, is that a range of new licensed Retailers have joined the market. These new-entrants are competing against the existing, established Wholesalers, some of which also set up as Retailers.

There has been consolidation amongst Wholesalers to form larger Retailers and indeed Thames and Southern sold their customers, not wishing to enter the market. The largest Retailer, Water Plus, consists of the former United Utilities and Severn Trent. Wave, being Anglian and Northumbrian. Castle Water, includes Thames and Portsmouth, whilst Business Stream bought Yorkshire Water’s customers, making a Big Four in the market.

Despite the large number of customers who can access competition, only about 3.5% of Water and Sewerage supply points (SPIDs) switch Retailer annually. Market research shows a lack of interest by customers and brokers, after the initial enthusiasm. The recent monthly rate of switches is down, in the region 6,500 from 10,000. Ofwat reported that just 4% of those that switched are receiving Water efficiency services.

Just 10% of the Water bill is for the Retailer services, so they have very little scope to offer significant reductions, as the other 90% are fixed. Industry feedback so far has been that through switching, the benefit is potentially just 0.5% to 4%. If you spend £150,000 each year, you may save £3,000 per annum with a typical 2% saving. We have seen examples of misleading headline claims of savings, which when you look at the details, clarify the reduction is purely a % off the 10% retail element and far less attractive. There are also large numbers of complaints directed at Retailers.

The rewards at this stage for carrying out a full tender exercise are limited, but it is hoped that in time, as happened in Scotland, the % saving opportunities will increase.

Those companies that do wish to engage, may at this stage be better advised to contact their Retailer and look for short term price reductions and added value services, such as better billing.

Market research suggests, some Retailers have expanded too fast, causing a drop-in service levels, providing an incentive for customers to look at other options, rather than focus on a cost benefit.

Please do not hesitate to contact us to discuss further or if you want us to test the market for you.