What to do in a volatile market

In just a short time, we’ve seen monthly power prices for this winter soar from around £54/MWh into the low £80s/MWh.

This ‘market mayhem’ has taken a lot of people by surprise and caused alarm for many energy consumers – especially those with volume still to purchase for the winter season.

So what’s going on – and what should you do? Let’s start by looking at the current market drivers…

Cold winter increases demand

An ideal place to begin is with that favourite of British conversation topics – the weather.

The recent cold snap has had a big impact on the markets, both in the UK and across Europe.

In the past few weeks, the Met Office has predicted a dry, chilly winter to come. Unsurprisingly, if this happens, demand for power and gas will increase.

New pressures compound anticipated shortfalls

This current winter has been in focus for a number of years due to fears over security of supply, with older thermal plants that have long provided stability and reliable output, taken offline and retired.

While this has been anticipated, the additional pressure of reduced French nuclear output has taken the market by surprise.

We rely on importing power from France, especially over our peak demand period (16:30 to 18:30) in winter.

But due to unexpected outages in the French nuclear fleet, their own capacity is under pressure, with interconnector flows often exporting in the opposite direction from the UK into France. And this is at a time when the UK has its own shortages.

Add to this the very cold weather France has been experiencing of late, and that’s increasing their demand further still.

So our capacity margins are getting ever tighter – which is pushing prices sky high. And while National Grid has estimated a capacity cushion of 6.6% this winter, their calculations don’t take into account the full scope of the current pressures.

Reduced gas storage capacity

The UK’s largest gas storage facility – Rough, located under the sea off the east coast – has been operating at reduced capacity for much of this year, while suspected leaks are investigated.

Normally, it would have been building up gas stores all through the cheaper summer period. But this hasn’t happened.

As Rough normally holds more than 70% of the UK’s gas storage, any reduction in capacity has a direct impact on gas supply in the UK, especially during a cold spell.

So with less capacity to hand, we’ll be forced to rely on importing more from Europe, which is more expensive due to a weakening pound since the Brexit-vote.

European gas production cut

Holland – which has a direct gas interconnector to the UK via the BBL pipeline – has dramatically cut back on gas production.

This is due to ongoing issues with seismic activity potentially triggered by exploratory drilling at its Groningen site (Europe’s largest natural gas field). Given the political sensitivities around this, the decision was made to limit the output. So, as a consequence, exports to the UK have suffered.

So what can you do?

This is where having a clearly-defined and robust risk management strategy is key, helping you react strategically to the market – rather than emotionally. (If you don’t already have one in place – or it needs reviewing – we can help you, taking into account your business’s individual requirements and appetite to risk.)

Understanding your budget is also vital – that way you can set upper and lower parameters to ensure you buy or sell at your desired price. We can provide the tools that help you automate this process.

Save time with expert market analysis

Having access to market intelligence and analysis is also important. While we sadly don’t have a crystal ball, we can analyse the market on your behalf to save you time, and identify the key drivers and opportunities to be aware of.

At the Optimisation Desk, we facilitate effective risk management and provide market updates and support to all our flexible customers. We also offer products such as Direct Budget Management, where we transact energy on your behalf and within your budget. So if you need any help or want to discuss your options, please do get in touch.

Meanwhile, market volatility looks set to continue, driven recently by the Brexit result and further uncertainty following the election of Donald Trump. So hold on to your hats – this could be a rocky ride…

oil-gas-energy

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