In recent years, UK energy prices have seen significant fluctuations, driven by geopolitical events, supply chain issues, and changing environmental policies. When it comes to commercial organisations, these fluctuations can pose serious financial risks, impacting everything from budgeting to profitability. Navigating this volatility is essential for long-term resilience and sustainability. With this recurring problem for commercial organisations, it’s important they face it and continue to grow and build their business.
Andrew King, founder of SGT, helps businesses across the UK find commercial energy tariffs that meet their needs while keeping costs low. A struggle Andrew has seen throughout his time in the industry is commercial organisations wrestling with ever-changing energy prices in the UK market. He believes some major contributing factors drive these changes and discusses strategies that can help businesses manage and mitigate the effects of a turbulent energy market.
A commercial organisation needs to first understand the causes of energy price volatility in order to learn how to navigate it.
Key Influences on the Energy Market:
Global Market Influence – The UK energy market is influenced by global factors, particularly in the wake of disruptions in international oil and gas supply chains. Events such as political instability in major oil-producing regions, sanctions on energy exports, and OPEC’s oil production decisions create ripple effects, raising prices across international markets.
The Transition to Renewable Energy – As the UK pushes toward a net-zero economy, the shift from fossil fuels to renewable energy sources is progressing rapidly. This transition is essential for reducing carbon emissions but has introduced challenges, such as intermittency in supply from renewable sources and the need for investment in energy storage technologies. Until the infrastructure fully supports this transition, renewable energy reliance can contribute to price instability.
Policy and Regulation – Energy policies and regulatory changes play a crucial role in the market. Carbon pricing, subsidies for green technologies, and environmental levies can affect energy costs, sometimes unpredictably. For example, the UK’s Carbon Price Floor (CPF) tax incentivises low-carbon energy production but can increase costs for companies that rely heavily on fossil fuels.
Supply and Demand Dynamics – Seasonal fluctuations in energy demand, especially during cold winters, can also lead to price volatility. When demand exceeds supply, particularly if the market has not diversified its sources, prices surge, placing additional cost pressures on organisations.
The Impact on Commercial Organisations:
Increased Operational Costs – As energy costs rise, operational expenses also increase. For energy intensive industries, this can squeeze margins and reduce profitability.
Budgeting Challenges – Budgeting becomes challenging in a volatile market. Price unpredictability complicates forecasting, making it difficult to allocate resources effectively.
Competitive Disadvantage – Organisations with less efficient energy strategies may struggle to remain competitive, particularly if their competitors have adopted more effective energy risk management practices.
Strategies to Handle Energy Price Volatility:
Fixed-Rate Contracts – One of the simplest methods for managing energy price risk is to enter into fixed-rate contracts. These contracts allow businesses to lock in a rate for a specified period, providing some protection from market fluctuations. While fixed-rate contracts can reduce exposure to price hikes, they may not capture potential savings if prices fall. It’s crucial to evaluate market trends and timing before committing to a long-term rate. The majority of commercial organisations will be on fixed-rate contracts simply because non-contracted rates with providers are generally considerably higher than fixed. A balance needs to be sought for contract term vs fixed price. Unless market conditions are seriously bottomed out, there’s little advantage in contracting for very long terms (e.g. beyond two years).
Flexible or Hedged Contracts – For organisations with a higher tolerance for risk or those that closely monitor market trends, flexible contracts with a hedging strategy might be more appropriate. Hedging allows businesses to buy energy at lower rates during times of low demand, securing savings while mitigating exposure to price spikes. However, this approach requires more active market management and a solid understanding of energy trends.
Demand Response Programs – Participating in demand response programs can reduce energy costs while supporting the grid. These programs incentivise companies to reduce or shift their energy usage during peak times. Organisations that can adjust their energy consumption patterns may benefit financially from reduced rates, contributing to overall price stability in the market.
Investing in Energy Efficiency – Improving energy efficiency not only reduces direct energy costs but also insulates businesses from price volatility. Implementing energy-efficient technologies, such as LED lighting, energy management systems, voltage optimisation and optimised HVAC systems, can cut usage and lessen reliance on external energy sources.
On-Site Renewable Energy Generation – Investing in on-site renewable energy generation, such as solar panels or wind turbines, offers a way to offset dependency on the grid. Though the upfront costs can be significant, the long-term payoff is a stable, self-generated energy supply, reducing exposure to market fluctuations and often qualifying the organisation for government incentives.
Energy Audits and Forecasting Tools – Conducting regular energy audits can help identify inefficiencies and areas for cost savings. Additionally, leveraging forecasting tools that provide real-time data and predictive analytics enables organisations to anticipate price changes and plan more effectively.
Collaborative Energy Purchasing – Organisations with smaller energy needs can explore collaborative energy purchasing by joining consortiums or energy cooperatives. By pooling demand, these groups gain bargaining power, securing better rates and reducing price volatility. This approach has become increasingly popular among SMEs looking for stability in their energy expenses.
Successfully navigating volatile energy prices requires organisations to look beyond short-term gains and embrace long-term strategies. Although the energy market will likely remain unpredictable in the years to come, a comprehensive approach—combining fixed and flexible purchasing, efficiency improvements, and renewable investments—can strengthen resilience.
For commercial organisations, they must have a proactive energy management system as market dynamics continue to shift. This will then enable the organisation to not only reduce costs but also support organisational sustainability, making it a vital part of the long-term strategic plan.
With a commitment to adaptability and innovation, commercial organisations in the UK can transform energy volatility from a risk into an opportunity, positioning themselves competitively in a low-carbon future.
