The Brexit effect on wholesale energy prices
29 November 2016
Typically during the winter months, the increased demand in energy causes spikes in wholesale energy prices, with suppliers having to pass on the costs to their customers, both in businesses and at home. These rises can seem pretty drastic to end consumers, particularly in relative comparison to prices throughout the rest of the year.
This year, however, the energy market has faced other financial challenges that look set to pile onto the woes of an annual winter increase. Despite usage – and therefore, prices – usually dipping slightly in the summer months, we actually saw a slight rise in costs back in June, on account of potential concerns over the prospect of Brexit.
Leading up to the EU referendum and following the eventual decision to leave, the energy market reacted quite negatively. This falls down to a number of things, including:
- uncertainties surrounding the overall economy in Britain,
- the falling value of the pound, and
- the UK’s plans for future global trade.
So what does this mean for businesses consuming energy on a daily basis? As we’ve mentioned, it’s pretty much inevitable to see energy prices rise over winter. However, it’s difficult to gauge just how drastic the effects will be and just how long they might actually last.
How do the wholesale markets work?
The energy market is a bit of a funny one, particularly when it comes to electricity. As a commodity, it’s not really feasible to stockpile huge quantities of electricity to put aside for a rainy day. Energy production, therefore, is dictated by consumer demand on a constant basis. Meanwhile, gas production relies heavily on the availability of fuel resources, whether acquired domestically or through foreign trade.
The chain of energy supply begins with those companies generating, producing or importing energy or fuel resources. The commodity is sold through the wholesale markets for energy suppliers to buy and pass on to their consumers, both business and residential. From there, suppliers recover the raw costs of the energy from their customers.
Producers are still able to meet increasing demands, and the National Grid is confident that its infrastructure is capable of sustaining power supplies throughout the winter. Of course a rise is expected, but the effect of the falling pound and instability in the global economy this year is certainly being felt in the wholesale energy market.
This means that producers will naturally need to charge more per unit of energy, in order for production to remain financially viable. As the wholesale price of energy increases, retail suppliers have no option but to look to their customers when it comes to covering the costs. Adding this to non-commodity charges set by each supplier, businesses are facing mammoth price hikes to continue consuming energy.
What about the future of energy prices?
The energy market has already seen significant inflation recently, and this could well grow larger after additional pressures from the colder season. While interesting news for investors – who may essentially experience a financial boost – it’s actually the end consumers of energy who’ll end up getting hit the hardest.
What’s more, industry analysts are expecting the increase in wholesale prices to last well into the new year. As the country faces a turning point in political and economical relationships, it’s uncertain to say exactly what might happen further into 2017 and beyond. However, businesses are being advised to brace themselves for potential pitfalls.
By not arming themselves with this knowledge early, businesses could be in for a nasty shock in the long-term. When it comes to renewing their contract with a supplier, costs are likely to be significantly higher than we might perhaps expect and shopping around for a cheaper deal could be pretty difficult.
To keep costs down, businesses may already encourage energy saving practices in the workplace. However, there could be other methods and practices to keep energy usage cost-efficient. Investing in energy efficient lighting and technologies – including time switches, daylight sensors and presence detectors – could help restrict usage to a minimum, keeping costs as low as possible.