By Tim Sealy-Fisher, Head of Key Accounts at Smarter Business

The recent spike in the price of oil and the knock-on effect on gas and electricity costs served as another reminder of just how volatile commodity energy costs can be.

Oil prices have increased 60% in the last year alone due to a rise in demand and restricted supply by the Organisation of the Petroleum Exporting Countries (OPEC).

In May this year, oil prices spiked to over $80 a barrel for the first time in almost four years, largely due to President Trump’s decision to reintroduce sanctions against Iranian oil. Meanwhile, the economic and political crisis in Venezuela – a country with the largest proven oil reserves in the world – has caused its oil output to decline to its lowest levels in decades.

Spikes in the price of oil feed straight into gas and electricity prices – following the surge in oil prices in June this year we saw winter 2018 prices reaching 65.00 p/th and £58.40/MW respectively.

Along with the price of oil, many other factors also affect gas and electricity prices:

The closure of the Rough facility led to limited gas storage capacity in the UK.

Gas storage facilities in Europe are at a 10-year low for this time of year.

The UK’s limited gas storage capacity makes us particularly vulnerable when we experience cold spells, as demonstrated by the gas deficit warning during the ‘Beast from the East’ at the end of February 2018, which sent intraday gas prices to 300p/th. Winter 2018 could potentially be very volatile again, especially if storage facilities are not refilled in time.

Reduced production from Groningen (Europe’s largest gas field) over the next few years will also tighten supply.

Summer maintenance schedules restrict supply. These unplanned outages make the task of restocking storage facilities much harder.

It is also essential for organisations to manage their electricity non-commodity costs, which continue to rise.

The government recently announced a consultation on widening eligibility for the current Energy Intensive Industry exemption scheme. The proposed changes would mean that more British businesses will benefit from a reduction in their energy bills – potentially lowering the threshold from 20% to 10% for energy-intensive industries.

As with the current scheme, all other customers would have to support this initiative through an increase in their costs. This could come as soon as 1st April 2019 for CfD and FiT (if introduced) and 1st April 2020 for RO. The numbers below indicate the impact this could have across RO, CfD and FiT charges.

Delivery year and potential increase range per MWh

2019 £0.50 – £0.85

2020 £1.35 – £1.80

2021 £1.50 – £1.90