Here in the UK, wholesale gas prices also influence the price of electricity - as we’re still very dependent on natural gas right across our energy system. In fact, around half of our electricity generation still comes from gas-fuelled power stations.
Since January 2021, the price of wholesale gas has risen by 250% - to the highest it’s been for 15 years. This has created price increases for business energy customers, who were paying around 147% more by the end of 2021. By April 2022, fully delivered business gas prices averaged around 8p/kWh.
Wholesale electricity prices therefore also rose - to the highest they’ve been since 1990 - meaning that by April 2022, business power costs averaged around 28-30p/kWh.
Since the all-time lows of 2020, unprecedented energy price rises have been caused by a perfect storm of different factors — some expected, some less so — which have combined to have a significant impact on the market.
The Russian invasion of Ukraine has had a major impact on the wholesale price of gas. Russia is the world’s largest exporter of gas, about half of which goes to Europe.
Volatility is built into the price of gas while the war continues, with some sources reporting that Russia is restricting energy supply to punish dependent countries for sanctions.
The UK itself is not directly reliant on Russian gas —only about 4% of our gas comes from Russia — but many EU countries are, specifically Germany; which gets 32% of its gas from Russia. However, Britain does import almost half of its gas from Europe, so the impact of the war on the UK is significant.
The EU is taking steps to resolve this, with a Green Energy Plan that aims to phase out the use of Russian fossil fuels and end reliance on Russia within the decade. Increasing the use of Liquefied Natural Gas (LNG) in the short term and deploying renewable energy faster are steps that both the UK and EU can take to decrease their exposure to future energy price risks.
While it’s impossible to predict every eventuality, energy market signals suggest that wholesale price volatility could be around for some time yet. While many forecasters expected the market to stabilise in early 2023, the energy crisis is now expected to continue for a further 12 months at least.
Although day-ahead prices for gas and electricity have seen some short-lived drops, rolling average prices support suggestions of an expensive winter ahead for business energy users. In fact, financial services provider Goldman Sachs has predicted that wholesale global energy prices may remain at twice their usual levels for the next two to three years.
When it comes to reducing the impact of rising wholesale costs on your business, there’s no silver bullet solution. There are, however, several actions every medium sized business can take to control costs and reduce risk. Key among them are:
Our new guide explores these actions and more, to help medium sized businesses navigate the challenging energy marketplace and protect their business and their budget.
Download Your essential guide to buying energy when prices are volatile: How medium-sized businesses can reduce costs and risk
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