As we woke to the horrific and slightly unbelievable news that Putin has gone ahead and invaded Ukraine, immediate thoughts and sympathies go to the millions of people directly impacted both in the country and beyond.
Then as the news sinks in, my mind moves to the potential implications on what is already a highly stressed UK energy market.
The high gas prices that we have seen to date, which have resulted in the failure of almost all small suppliers and a 50% hike in the price cap, had some element of political risk factored in, but to a large extent were a function of global supply and demand. I don’t believe the risk of Putin escalating to war footings was fully believed or priced in.
The market response today confirms this and whilst undoubtedly a sense of panic is inflating prices still further, there is a new reality on the flow of gas, or lack of it from Russia. I’m not sure anyone would support the case for continued trade whilst the people of Ukraine are under attack.
The reality if not true before, but is becoming increasingly certain, is that high gas prices, and therefore electricity prices and balancing costs will be with us for a significant period of time.
In the UK, whilst high prices have been talked about for several months now, the reality is that the full impact of them has not yet been really felt by domestic or business customers. Domestic customers have legitimately had the protection of the price cap, but as the April increase shows, and without doubt the October review to follow, all that is really happening is that the pain of increased costs is being pushed down the track. And that pain is just now starting to be felt. The £200 credit promised by the government may help a bit, but is a short term sticking plaster and inadequate for those who really need it, when compared to the new costs being faced.
Likewise, most businesses will have contracts in place which secured the price of energy, for a period of time, at lower rates than are currently prevailing in the market. As contracts start to come to an end, or energy is bought for future seasons, the increase in costs and their impact will start to be felt. In a post COVID recovery period, these costs are unlikely to be affordable for many - the ‘nice to haves’ such as REGO backed green energy, are already being dropped.
So, with a new reality of long term high energy prices suddenly upon us, decision making and usage will all pivot to a focus on one word- affordability.
So as we navigate through this new reality- what can realistically be done?
- Government: The government cannot bail out the whole country. The cost of energy is what it is. It can however, really focus on helping the most vulnerable consumers and target support to help them. We know broadly who falls into this category- suppliers maintain Priority Service Registers, we can see who is already on prepayment meters, it is easy to identify those who are using well below ‘normal’ levels of power. Targeting support at these customers on an ongoing basis will deliver far more than a ubiquitous short term sticking plaster. Those suppliers who are still in the market, are currently making a loss on their customers, and are looking down the barrel of increasing customer debt, so can’t be expected to further subsidise customers.
- Consumers- domestic and business: There have been some mis-firing and crass ‘cuddle a dog to keep warm’ messages since prices have started to rise. However, there is a core reality behind the marketing- ‘the cheapest KWh of power is the one you don’t use’. We can all, whether in business or at home, proactively review how we are using energy and importantly when, and take action to change habitual patterns where possible.
- Market & Investors: Anything that can be done to accelerate the transition away from our current reliance on gas will be good for long term energy prices. The small bit of good news is that as a consequence of market price hikes, the business cases for new to ground renewables and investment in energy reduction and flexibility solutions have suddenly become massively more attractive on a merchant basis. With more available through Cfds and high clearing prices in the Capacity Market, there is support available too. Investors need to be bold and any changes to regulation and policy need to support that boldness.
As someone said to me this morning ‘we are in a bonkers market’. It is harder now than in the last 25 years to predict where prices will go next- but as always hope does not hedge risk. Prioritising action at all levels is what will get us through. And let’s just hope the war in Ukraine is over quickly, for its people and all the ripples of its implications.