Why understanding of the energy market is more important than ever

3 mins read

By Anthony Ainsworth, COO at npower Business Solutions

It is perhaps an understatement to say that the past few months have been volatile in the energy market. As a result, there has never been a more pressing time to understand how the energy we use is generated, traded and supplied, particularly for energy intensive sectors such as manufacturing.

However, we know that this is not as easy as it sounds. The energy market can be difficult to navigate, particularly as it can change on a daily basis. Combine these things with the headlines we’ve seen recently, and it can seem like a very confusing place, particularly if you’re trying to make an informed decision about your energy strategy.

In this article, I hope to answer a few of the common questions we hear when it comes to energy supply, what is influencing the prices you pay, and some of the key steps to take to protect against market volatility.

Where does our energy supply come from?

The largest share of our electricity – almost 60% – comes from low-carbon sources, including 28.4% from wind and solar, 14.7% from hydro and other renewables and 16.1% from nuclear. The share of our electricity generated by carbon-emitting fossil fuels - mostly natural gas - has reduced to less than 41%. And we imported 8% from other countries via our growing number of undersea interconnectors, of which 66% was from low-carbon sources, for example, from French nuclear and Norwegian hydro.

Do we rely on imports?

Just over 25% of our energy was imported in 2008, peaking at nearly 48% in 2013. But as the UK’s wind generation capacity has increased – and our overall energy consumption reduced due to increases in energy efficiency and a decline in industrial activity – it’s now around the 36% mark.

If renewables are growing, why are energy prices so high?

In one word, the answer is: gas.

Due to the move away from coal, gas has become our dominant fuel, which allows it to influence the price of power. As so much power generation relies on gas, power markets therefore closely track gas markets, despite almost half the UK’s electricity now being supplied by low-cost renewables.

And, rather than having separate markets to trade each energy technology separately, or having a combined market  all generation – regardless of source – is instead bundled together and traded as units of energy (MWh), with gas values influencing the price.

What is driving wholesale prices?

A large range of factors can influence energy prices. Firstly, there are straight-forward supply and demand dynamics – the balance between what’s being produced and what’s needed.

Weather is another key factor. As well as seasonal variations, unexpected or sustained colder or hotter temperatures can increase or reduce forecast demand. Wind and sun availability are also important.

Political issues can play a big role too, as has been evident with Brexit and is currently a large influence due to the ongoing situation with Russia.

Economic factors also feed into the mix, for example, growing economies in Asia are also creating increased competition for gas.

Taking action now

So, what can organisations do now to reduce risk in these volatile times?

  1. Consider your contracts - Those on a fixed contract may want to consider a longer-term contract, as these will offer cheaper rates than expensive one-year supply deals. For flexible purchasers, it is wise to re-evaluate your strategy to ensure it reflects the current level of risk appetite and that electricity and gas budgets are realistic in the current climate.
  2. Maximise energy efficiency - it goes without saying that the less energy you use, the less you will pay. Energy efficiency really is a no regrets action to take.
  3. Become more self-reliant - investing in sustainable on-site generation such as solar, wind or combined heat and power (CHP), has multiple benefits, not least making your organisation less reliant on the grid.
  4. Consult an expert - work with your energy partner to help you make a strategic plan.

For manufacturers, gaining a greater understanding of the UK energy market is crucial to making an informed decision about your energy strategy.

That is why we have launched a series of ‘Energy Made Simple’ reports, which are designed to provide a straight-forward explanation of all the key aspects of energy that will help you become more informed about the power and gas your organisation consumes.