Produced in Association with SERIES 22 / Module 07 Energy Purchasing
with several storms impacting infrastructure and energy supply. As the year closed, colder-than-
average temperatures set in, driving up heating demand and accelerating gas storage withdrawals across Europe, adding to market pressures amid ongoing geopolitical tensions. Power for gas demand also increased towards the closing quarter of 2024.
Government support Since the Energy Bill Relief Scheme (EBRS) ended, government support for business energy costs in the UK has been more targeted. The Energy Bills Discount Scheme (EBDS) replaced the EBRS in April 2024, however, the EBDS provided a unit discount for electricity and gas bills, but only when prices exceeded a set threshold, meaning that a significant number of businesses are now without support despite their energy spend surging.
What is happening now? UK prices have fallen since the Energy market crisis in 2022; however, despite their retracement, prices do remain elevated compared to the pre-2020 range. Throughout 2024 the markets incrementally climbed (with an array of fluctuations) due to geopolitical tensions and aggressive storage withdrawals. Figure 3 below summarises gas and electricity commodity prices in January 2025. Markets reflect cheaper prices for contract delivery further out on the curve. How businesses approach future
Commodity Gas Electricity Commodity Gas Electricity Day Ahead 4.2 p/kWh 11.1 p/kWh Winter 26 3.3 p/kWh 8.0 p/kWh
energy management is dependent on individual business strategy and risk appetite. Market participants still note that the upside risk for electricity is based on August highs of 60p/kWh and for gas at 20p/kWh.
What does this mean for my business? The most important element with respect to risk management is to establish and assess the ‘risk appetite’ of your business. No longer do energy prices have an immaterial impact on your business cashflow or profitability. If market fundamentals change to more unfavourable conditions ahead of next winter, premiums may be increased for energy commodity prices. Figure 3 below summarises
contracts available for businesses with a typical annual usage of 500,000kWh or more, highlighting the pros and cons of different buying strategies.
Fixed price contracts Standard fixed price contracts guarantee a unit rate and budget certainty for the contract duration, however during a falling market there is a risk the contract is locked in too soon and lower prices are missed.
Flexible purchasing A flexible purchasing contract allows businesses to have multiple transactions and opportunities to purchase and sell. Below provides two strategies, one which is
Q2-25 4.1 p/kWh 9.2 p/kWh Summer 27 2.6 p/kWh 6.5 p/kWh Figure 3 – Gas and electricity commodity prices in January 2025
aggressive and risky, and the other a long term-controlled approach to risk, providing some budget certainty but also flexibility to react to future market changes.
Short term spot strategy Businesses who are exposed to energy prices in 2025 can leave either 100% or a proportion of volume to the spot market which is offering better value than paying a premium to guarantee a rate through summer 2025 currently. Whilst this is risky, spot prices
have outperformed settlement prices eighty percent of the time since 2022, including during the Energy crisis. Day ahead prices are being driven by short term supply demand fundamentals such as grid demand, renewable generation available, LNG schedules and temperature forecasts. To access spot prices a flexible contract is required. If market fundamentals change, businesses also have the option to buy out any remaining volume. This strategy may be effective
in the short term, with the current market backwardation, prices are currently trading considerably cheaper for delivery from 2025 to 2029. Leaving volume to trade on the
spot market provides the highest risk and zero budget certainty; spot prices have averaged c7.1p/kWh for electricity over the last twelve months even with market spikes, considerably lower than the fixed prices offered by the market for a guaranteed period.
Summer 25 4.0 p/kWh 9.1 p/kWh Winter 27 2.8 p/kWh 7.6 p/kWh Winter 25 4.0 p/kWh 9.4 p/kWh Summer 28 2.4 p/kWh 6.5 p/kWh
Long term risk management Bespoke flexible energy contracts allow businesses to implement a pre-determined hedging strategy. Gas and electricity prices for delivery beyond 2027 are trading considerably lower than contracts due for delivery in 2025 and 2026. An example is to buy an initial 25% to 50% of volume for delivery from 2027 to 2029 to provide some budget security and eliminate a proportion of volume from future market volatility. This buying strategy aims not
to chase the market bottom for all volume, but to provide a controlled, long-term approach that protects businesses from future exposure to high prices. It also allows for the opportunity to buy some volume as late as possible if prices continue to fall, balancing the potential for upside risk with the possibility of downside losses, as summarised in the tables below (figure 3). Businesses can sell volume
back to the market at a profit if prices increase, releasing volume to then re-buy later at a lower price. An approach to energy procurement that proactively manages risk and minimises exposure to future market increases, with volume purchased in incremental hedges, provides a long-term controlled buying strategy. This strategy minimises the risk of exposure to extreme energy market spikes, as seen in 2022, which could recur due to geopolitical tensions and uncertain supply metrics.
Summer 26 3.2 p/kWh 7.4 p/kWh Winter 28 2.6 p/kWh 7.3 p/kWh Summer 29 2.4 p/kWh 6.1 p/kWh
Produced in Association with
EIBI | FEBRUARY 2025
21
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