In early August, Ofgem, the UK’s Office of Gas and Electricity Markets, announced that the default tariff price cap would increase by as much as 12% on the most commonly used energy tariffs.
Ofgem boss Jonathan Brearley blamed rising wholesale energy costs for the increase: “The reason the price cap is going up is there has been a record increase in energy prices across the board, not just in gas and electricity but in petrol and diesel".
Over the last six months, wholesale energy costs have increased by circ. 50%. Gas prices in particular have soared globally this year owing to a number of factors: Low stock levels, outages at gas plants and gas fields curbing domestic supply and imports from Norway, and, a buying spree in Asia due to the reduction of the use of coal has also led to fewer international deliveries of liquefied natural gas (LNG).
Furthermore, global gas prices are expected to break records this winter, surpassing last year's peaks, when a deep freeze across north Asia sent the global price of LNG soaring more than 200% to record highs.
Today in the UK, gas is still the principal source of energy generated in the UK. In July, as much as 41% of the UK energy mix was derived from gas, meaning the UK is directly affected by global wholesale energy prices. The growing adoption of renewable energy in the UK will help balance the impact of price volatility of natural resources, but this will take many years to come to fruition.
What can businesses do?
Businesses should think about both short-term fixes (reducing energy consumption) and a long-term strategy (becoming less dependent on fossil fuels and international energy markets). Demand Side Response (DSR) is a service that could potentially do both, and businesses should take a serious look at the benefits:
- Turning down/off energy temporarily makes a lot of sense when the cost of energy is on the rise. Choosing the right DSR aggregator and service will also mean the effect of turning down energy will have limited impact on occupants, operations and productivity.
- Creating “flexibility” in the UK’s energy system will accelerate the deployment of renewable energy which means we take a step closer to greater dependency on the more sustainable and carbon neutral energy sources. This will in turn means the UK will be less affected by volatility of future global wholesale energy prices.
- Participating in National Grid’s Balancing services will mean additional revenue for each megawatt diverted at times of peak energy use.
Many businesses are now reacting to the news from Ofgem and are revising their financial projections for 2021 and beyond, and potentially squeezing the bottom line in other areas. However, smart businesses are already evaluating alternative mitigating strategies and considering initiatives such as DSR which could ultimately lead to a net positive impact on their business and margins.