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What is driving the current increase in energy prices ?

06/09/2018

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Your business energy renewal has just hit, and wow, that’s a considerable increase over the current energy prices but why?

Cost of generation

The marginal cost of generation drives the market or to put it another way the lowest price of the fuel used to generate the energy. European Governments have been on a mission to move towards cleaner forms of generation. This trend, coupled with carbon emission prices at a ten year high has resulted in gas becoming the default fuel to generate, and therefore the marginal cost of this is driving the market.

High gas prices

The last month had seen gas prices rise to their highest levels since last December when a vital supply line exploded! The increase has bucked the usual trend of lowering energy prices in the Summer when the need for heating reduces, and lower demand drags down prices.

The last winter was the coldest since 2012, and as we all shivered, we turned up our thermostats and drained the gas storage tanks. The heatwave of the summer added to problems as Europe’s airconditioning kicked in to cool us down. Add pipeline maintenance, industrial disputes on oil fields and the result has been storage tanks reducing to 20% full. The official line is that storage is at the lowest it has ever been in the lead up to the heating season starting in October.

High demand from China

Demand in China is also adding to the problem as cargoes of liquefied gas (LNG), which may have eased the problem in Europe, are diverted toward their ever thirsty needs.

The graph below from SSE indicates the trend nicely, with circa 50% increase in the year and most of it in the last four months.

Wholesale Energy Prices

The result of all this is a perfect storm with no immediate end in sight. Just as seasonal increases kick in, lower storage and Chinese competition are sending prices ever higher. There is also the spectre of Brexit and how it may impact the pound coupled with the effects on the cost of oil, should Iranian sanction bite.

Conclusion

We cannot predict the future, but given this backdrop, if you are due to renew over the next few months, our advice is to benchmark soon and fix for as long as you can. In a few months’ time, the current energy prices may look cheap.

Why not let troocost.com show you what a good price looks like

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