Covid-19 crisis creating two-sided pressure on energy prices

Posted on 15 April 2020

As global demand for energy plummets due to the lockdown measures operating in many countries, so gas and power markets have dropped to record lows. But what may surprise some, is that UK energy prices are not falling to the same extent, due to upward pressure from the non-commodity charges that can account for up to 60% of the overall bill.

“Reduced demand from industrial and commercial businesses has driven prices down,” explains Sam Hill, Portfolio Manager on the nBS Optimisation Desk. “Oil prices have also dropped, taking gas and therefore power with them, as traders and hedge funds move their money to more stable markets like gold.”

But as Helen Inwood, Non-Commodity Charging Manager at nBS explains: “As large businesses and SMEs close down, it means there is less consumption available to recover the cost of the different non-commodity charges. The chargeable rate must therefore increase to ensure that the full cost is recovered.”

How much each charge increases will depend on the UK’s overall demand reduction –  and the timing of when increases will hit bills will vary according to when the chargeable volume is applied to each charge.

“Some charges will be seen more quickly than others – for example, Balancing Services Use of System (BSUoS), Capacity Market (CM), Feed in Tariff (FiT) and Contracts for Difference (CfD) will increase this year,” says Helen. “While others are unlikely to impact bills until next year, or ever the year after. For example, Renewables Obligation (RO), Distribution Use of System (DUoS), Transmission Network Use of System (TNUoS) and gas transportation.”

Meanwhile, other factors in the energy market are creating ‘bearish’ (i.e. deflating) conditions. “Temperatures are warming up, there is plenty of Liquid Natural Gas (LNG) supply and there are good levels of renewable generation,” explains Sam. “Although as the warmer weather moves in, wind is starting to drop – and a prolonged period without wind could lead to some market upsides. Based on current forecasts, this could materialise in the next few weeks.”

“There also appears to be less liquidity in the market, so when things do start trading more freely, the move to the upside is likely to be pretty stepped, especially for power,” continues Sam.

For more help and support around managing your own business’s energy requirements – and for an updated forecast of future non-commodity charges – talk to your Client Lead (for existing customers). Or send an email to nBS@npower.com.

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