Energy procurement

Troubling signs for electricity and gas procurement this winter

The recent news surrounding EDF’s temporary closure of 20 of its nuclear reactors in France while it fixes pipe problems has sparked some dramatic volatility within the energy wholesale market.

These supply worries have driven French and German forward power prices to new heights in the lead up to the notoriously volatile winter period. This now has all the signs of a systematic issue with these reactors, all the while the French-UK interconnector is now continuing to export 2 GW to France daily.

News of this turbulent nature has led to the worsening of the situation for businesses looking to procure their energy contracts over the next few months. This, along with the other negative supply fundamentals makes for very grim reading.

Bullish Factors (influences of price increases):

  • Increase in the price of coal (at time of writing, trades are reported above US$82/tonne).
  • Oil markets continued their upward momentum, posting gains for the last three trading sessions with increasing confidence in OPEC member states making oil production cuts.
  • A weaker dollar ($) and pound (£) and an upward revision to OPEC demand forecasts also contributing to the increases.
  • Wind generation fluctuates all the time but has been even more volatile of late and can not be relied upon to fill the gap when demand outstrips supply.
  • Recent fluctuations of the gas and electricity systems being over and under supplied.

However, it is not all bad news:

Bearish Factors (influences of price decreases)

  • The maintenance on the Norwegian pipelines went smoothly with capacity back up to normal levels.
  • The Corribfield in Ireland also returned from lengthy downtime further subduing demand.
  • United States increasing its output of LNG and oil.
  • The weather forecasts look promising over the next few weeks.

With EDF giving no timescale for the works to be completed on their nuclear reactors, the large spikes we have seen of late may well continue. The general outlook away from EDF’s nuclear issues is that there will be an average week on week increase in wholesale prices. The decisions over what to do as to the best procurement strategy are always difficult but have become even more so at present.

In our experience the key to getting the best energy prices for you and your company, is how you manage your contract as a whole and not just over the winter months. Savills Energy advocates a dynamic, market-informed purchasing strategy throughout the year to optimise the opportunity to take advantage of positive market conditions whatever the season. Contract purchasing in the winter period may be more volatile, but you are not necessarily guaranteed higher prices.

Currently we are entering one of the most volatile winters we have seen for many years, with energy prices at historically unstable levels but trending upwards week after week. Our general advice to businesses given the current market conditions is to review your contract options in the context of your business drivers and be clear on the renewal outcome that you seek, before securing your contracts. Whether that’s locking in savings before Christmas or taking a longer-term view, you’ll be in a stronger position with a tailored strategy in place.

 

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