April 20, 2023
Energy prices have been on all of our minds recently more than ever! The industry has been a rollercoaster of emotions over the past few years, meaning we have not been able to take our eyes off it.
This blog discusses gas and electricity price forecasts, how prices have changed since 2021 and how they could change between now and 2025. We have also asked some of our experts for their thoughts on the crisis, how they think businesses should prepare for the future and how the energy industry will look a few years from now.
An energy price forecast is a projection of what the future price of gas and electricity will be over a certain period of time. This forecast considers various factors that influence energy prices, including supply and demand, weather patterns, geopolitical events, technological advancements, and regulatory changes.
A gas and electricity price forecast is created using a combination of quantitative and qualitative analysis. Quantitative analysis involves using mathematical models to analyse historical data and trends in order to identify patterns and make predictions about future prices. Qualitative analysis involves considering factors such as geopolitical events and regulatory changes that may not be easily quantifiable.
There are various types of forecasts that can be produced, including short-term, medium-term, and long-term forecasts. Short-term forecasts typically cover a period of weeks or months, while medium-term forecasts cover several months to a year, and long-term forecasts cover multiple years.
Energy price forecasts are important for energy market participants such as energy producers, traders, and consumers, as they help these stakeholders make informed decisions about buying, selling, or using energy. These forecasts can also be used by policymakers to inform their decisions regarding energy policies and regulations.
The summer of 2021 marks the start of the energy crisis, with the lockdowns ending and businesses reopening, there was a huge spike in energy usage in many places all over the world, especially Asia and Europe. This instantly put a strain on the energy supply, meaning wholesale prices had to rise. Another reason for higher prices would be the lack of wind energy produced throughout this time, as there was less wind, there was less wind power produced, meaning a lack of storage meant a larger strain on other energy sources.
A fire at the IFA1 Interconnector in September 2021 also created some difficulties in the industry, with an interconnector shut down, this meant less energy availability in the UK and price increases followed.
The winter of 2021 was when prices really started to rise. As we all know, there is generally more energy used throughout the colder months, as people spend more time indoors and heating is generally used to heat homes, offices, and other types of buildings. With energy sources already strained and storage being depleted, this increase in energy usage put a huge spanner in the works.
In early 2022, Russia invaded Ukraine, which caused a massive disruption in the energy industry, as Russia is one of the largest energy distributors, the sanctions and tension created a huge spike in prices, and this war is still ongoing, meaning prices are still being affected by this today.
In the summer of 2022, the war in Ukraine continued to create issues for the energy industry, with the largest spike in prices coming during this time, this could be blamed on the unpredictability of Russia and the energy they provide to the rest of the world, especially Europe. Along with the continuation of previous issues, energy prices for both domestic and business customers rose significantly.
In early 2023, the energy sector was still dealing with the aftermath of high wholesale energy prices from the end of 2021, influenced by factors such as increased gas costs, low wind energy generation, and a significant fire at the electricity interconnector between Britain and France. These high wholesale prices led to a general market volatility, resulting in energy suppliers revising their tariff prices.
However, there was a notable decrease in the price of wholesale electricity between July 2022 and May 2023, falling by 75%. This reduction in wholesale electricity prices was a significant change from the previous trends.
Despite these reductions, the UK energy market continued to face challenges. In 2023, the government and the North Sea Transition Authority announced a commitment to future licensing to secure the UK's domestic energy supply and reduce reliance on countries like Russia. This move was expected to decrease the impact of imported liquified natural gas, as locally sourced gas was estimated to have a quarter of the environmental impact of imported resources.
Towards the end of 2023 and into early 2024, the energy price cap, which limits the maximum amount energy suppliers can charge for each unit of gas and electricity, saw an increase. From January 2024, the price of energy for a typical household using gas and electricity, and paying by Direct Debit, went up by £94, raising the energy price cap from £1,834 to £1,928 per year.
This increase in the energy price cap was attributed to a substantial rise in the cost of wholesale power, which went from £96.64 to £129 per megawatt-hour, an increase of nearly 34%. This rise, combined with growing geopolitical tensions, suggested further increases in energy prices, affecting both domestic and business customers in the UK.
Prices in 2023 so far have been positive, we have seen a decrease in prices and a much more stable industry. With a much steadier price across gas and power, prices are expected to steadily decrease over the remaining months of 2023, however, this is not a guarantee as anything can happen when the industry is so unstable and volatile, as we have seen over the past couple of years.
The Energy Bill Relief Scheme (EBRS) has been succeeded by the Energy Bills Discount Scheme (EBDS), as the former has now been discontinued. From the 1st of October 2022 to the 31st of March 2023, the Energy Bill Relief Scheme facilitated discounted rates for energy bills imposed upon businesses. Instead of enforcing a rate cap, the government fixed a ceiling on the wholesale price that energy suppliers are required to pay to energy producers.
The monetary advantage obtained by the suppliers was then transmitted to the consumers in the form of a cut on the cost per unit rate of all business energy contracts entered into after the 1st of December in the year 2021. The discounts were also applied to businesses with flexible contracts, out-of-contract arrangements, and those with deemed rates.
For the six months between the 1st of October 2022 and the 31st of March 2023, the highest sum that suppliers paid for electricity was£211 per megawatt-hour (MWh) and £75 per MWh for gas (or 21.1p per kWh of electricity and 7.5p per kWh of gas). This was considered the fundamental wholesale price established by the government.
For businesses with fixed-rate contracts, the discount was calculated as the difference between the baseline wholesale price established by the government and the agreed-upon rates when the energy contract was signed. Kindly visit the government website to determine how much discount is to be received.
In the event that the reference wholesale prices dropped below the government-endorsed price, discounts were no longer applicable. This transpired on the 26th of December in 2022, which signifies that any deals that were entered into between that date and the 16th of January in 2023, which was the latest data available, would not be qualified for a discount under the scheme.
For businesses with out-of-contract arrangements, deemed contracts, or variable rate contracts, the discount was determined as the variance between the baseline wholesale price set by the government and the relevant wholesale price charged by the supplier. However, the discount was subject to a maximum limit of 34.5p per kWh for electricity and 9.1p per kWh for gas.
Energy prices in 2025 are expected to be much more stable than they currently are or have been over the past couple of years. This steadiness, however, relies on a few factors, for example, the UK becoming much more energy-independent and a net producer. If we are able to produce most of our own energy, which would hopefully be renewable, we would be a much stronger nation when it comes to energy supply.
We would also have much steadier prices and way fewer spikes if we produce more of our energy, as we do not have to rely on other countries to supply our energy, and factors such as the war in Ukraine would affect us much less.
In essence, if we become a country which produces its own energy and relies mostly on renewables, we would be in a much better position than we are now, cutting down price spikes, storage issues and many other factors that come with importing energy from various other countries.
As we look towards 2025, an important aspect to consider is the forecast for energy price caps. With fluctuating market conditions and evolving regulatory frameworks, predicting exact figures remains challenging. However, industry analysts suggest a trend towards gradual increases in price caps, influenced by factors like rising production costs, investment in sustainable energy sources, and global economic trends.
This rise could impact both consumers and businesses, necessitating strategic planning to mitigate financial strain. Staying informed about these forecasts is crucial for effective budgeting and long-term planning in the face of an ever-changing energy landscape.
Small businesses are the most vulnerable to increases in energy prices, which means they need to do the most research and planning to act when prices rise. With this in mind, here are some ways you can make sure you are affected much less when prices increase:
In conclusion, an energy price forecast is an essential tool used by energy producers, traders, policymakers, and consumers to make informed decisions about buying, selling, and using energy.
This blog has highlighted how the energy prices have changed over the past three years, with the summer and winter of 2021 seeing a significant increase in prices due to a surge in demand, lack of wind energy, and Russia's invasion of Ukraine in early 2022, which disrupted the industry. However, the current year of 2023 has seen a steady decrease in prices, giving hope for a decrease in price caps.
The blog also touched on the Energy Bill Relief Scheme, which has now been replaced by the Energy Bills Discount Scheme, which provided discounted rates for energy bills imposed on businesses.
Our experts have given tips on how to use this scheme to save on energy costs, and we encourage everyone to visit the government website to determine how much discount they can receive. Overall, energy prices remain volatile, and it is essential to keep up with the latest energy price forecasts to make informed decisions.
DBS is extensively experienced in helping business keep their bills low and prepare for the future of the energy industry. Our team look deep into your business to find the perfect solutions and futureproof your business to protect it from possible fluctuations in the industry. Get in touch with our team to learn more and get started!
