The business energy and broader energy markets have seen the most volatile period in recent memory. The impacts of the post-Covid economic recovery and political hostilities worldwide have made natural gas prices grow by an unprecedented amount. This has a direct effect on the cost of wholesale electricity prices due to the reliance on gas for our power system. More and more businesses across the country are struggling with the impact of rising wholesale energy costs. A recent report commissioned by nPower showed that 80% of companies have energy as a board-level concern, which is now their top concern. So, what does the future hold for business energy?
A recap on the business energy market in 2022
At the end of 2021, the government’s focus on energy was its goal of reducing carbon dioxide emissions. However, the Russian invasion of Ukraine in February 2022 raised several new challenges. Energy security, cost, and source. The government quickly reacted, committing to end its reliance on Russian hydrocarbons.
Although the UK is less dependent on Russian suppliers than some other countries, it did not escape the impact of the invasion on the international gas market. The Government released an Energy Security Strategy to ensure “secure, clean and affordable British energy for the long term.” This included financial assistance for domestic customers and announcing UK offshore oil and gas licencing. But it also reopened the discussion around onshore shale gas exploration that had previously been suspended.
Liz Truss became Prime Minister at a turbulent time, with real pressure on the Government to act on the sharp increases in energy costs. For business customers, it was announced that the Government would subsidise the wholesale price for both Gas and Electricity. These supported prices were quickly passed through parliament, resulting in at least short-term relief for some businesses.
We know that the government had set a target of a zero-carbon power system by 2035, and the closure of all coal-fired plants by October 2024 was part of this plan. However, with the recent concerns over energy security this winter, contingency contracts have been agreed upon with two plants due to close in 2022. It’s been a difficult year for the Government trying to balance its global commitments to reducing emissions and at the same time ensuring a secure and affordable supply for all users.
In December following initial discussion at the G20 summit, the Prime Minister and President Biden announced a new energy partnership. The new ‘UK-US Energy Security and Affordability Partnership’ is committed to reducing global dependence on Russian energy supplies. This includes a commitment by the US to more than double their exports of Liquified Natural Gas (LNG) to the UK next year. As well as attempting to drive international investment in clean energy technologies.
Self-generation energy, self-protection for businesses
One of the ways that businesses can protect themselves is by generating their electricity, with the option to sell any excess back to the grid. This allows them to reduce their electricity bills and carbon emissions. This self-generation process can be more efficient than traditional methods because it will enable businesses to get more value out of their resources than they otherwise might.
This is a relatively new development in the energy industry, but it’s already becoming more common. Organisations across the country have installed onsite generation equipment to manage energy costs. This can include photovoltaic (PV) systems, wind turbines or micro combined heat and power (mCHP). As well as Biogas-produced electricity from waste products from the food, agricultural and water industries. This self-power generation and grid injection from businesses in the UK could reduce our reliance on imported natural gas, support net zero and lower energy costs for all consumers.
There are considerable benefits to installing on-site renewables. Less reliance on the grid means lower exposure to wholesale energy prices. The ability to generate revenue from electricity sold back to the grid. As well as helping businesses meet their sustainability goals. These projects often require a significant investment, something many companies today would be wary of committing to. With most projects showing an ROI of over ten years, this is a big commitment given the economic climate.
Changes in policy and regulation will be required to help drive this move towards self-generation. Tax deductions for equipment purchases and lower taxes on revenues generated by these processes. Changes to legislation around business operations to help ease the balance between power supply and power demand. And finally, refining planning rules so that wind and solar generation installations can be approved more quickly and with less cost. It takes much work to balance the views of the national government, local authorities, planning departments and other local stakeholders. Businesses could have a fundamental part to play in helping the UK become more self-sufficient, reduce energy costs and help reduce emissions.
A look to the business energy market in 2023
Several unknowns exist as we move into the first winter with reduced Russian gas supplies. The weather across Europe this winter will impact prices more than ever. If we have cold winter with still conditions, gas demand will be higher. This will result in European gas storage being depleted, which will support the summer 2023 price as demand increases as these are replenished.
What happens in Asia will also have an impact – with Europe replacing Russian gas with LNG, we will need to compete with Asia for LNG cargoes. So far this winter, Asian demand has been low due to weather conditions and the ongoing covid restrictions. However, if the weather turns cold in Asia and when restrictions are lifted, the European gas price will need to increase to entice LNG cargoes from the Middle East. However, the recent UK/US energy partnership has set this as a key priority – to secure supply and reduce price volatility. And the increased imports from the US to the UK will also ease the burden on European partners.
The risks aren’t limited to gas supply; the power margin in the UK remains low this winter and heavily reliant on renewable generation and interconnector flows, which can be volatile. With three nuclear reactors decommissioned in 2022, nuclear generation capacity is only 6GW at total capacity. This results in extreme prices in peak, low wind periods with over £1000/MWh already being hit for the 5-6 pm period this week.
On the other side of the coin, we have seen demand reduce as energy-saving measures come into force. We have also seen consumer habits change due to the high prices. You could also argue that a significant risk premium is priced into 2023 contracts, which may erode as we get closer to delivery.
The future – putting your business in the best position
This is a turbulent but exciting time for energy as we transition from a centralised carbonised generation model to a decentralised decarbonised one. While challenges still need to be overcome, the future looks bright for companies investing in renewable energy. And for those businesses unable to produce their own renewable energy, adding new sources provides more access to these greener energy sources. For help in finding the right energy contract for your business get in touch with us today.