TPIs and brokers: Brace for two years of extreme volatility


rollercoasterThird party intermediaries are warning businesses to brace for two years of volatile energy prices, following extreme market swings over the last year.

At the start of 2016, natural gas prices were low, with many predicting further falls, yet during the second half they roughly doubled. While globally there is plenty of gas, reduced storage capacity at Rough could introduce further volatility over the coming year, compounded by swings in Sterling.

Average power prices started the year in the doldrums, but had recovered to 2014 levels by December, taking in lows of £30.15/MWh and highs of £170/MWh along the way.

“The volatility we have seen within power markets in 2016 was unprecedented,” according to Frank Rabusic, head of trading and risk management at third party intermediary, Amber Energy.

Frank Rabusic: incoming volatility
Frank Rabusic: incoming volatility

“I believe that over the next year we are going to see increased volatility in the market and reduced liquidity due to uncertainties around both the end products – wholesale electricity and natural gas – and also the components that drive the price,” says Rabusic. “That is, the price of carbon, the price of coal and the price of renewables, plus currencies and the price of oil.”

Moreover, as the UK looks set to exit the single market, ongoing uncertainty over Brexit terms and outcomes compounds a volatile commodities sector.

“We are looking at two years of extreme instability,” Rabusic reckons.

That means businesses need to revisit energy risk management plans to ensure they are fit for the current environment.

“The biggest risk facing firms in the year ahead is complacency,” according to Omar Rahim, CEO of third party intermediary Energi Mine. He thinks procurement departments, grown used to soft market conditions, may pay the price of short-termism over the coming months.

Omar Rahim: Complacency costs
Omar Rahim: Complacency costs

Speaking to The Energyst on key energy risks facing UK businesses in 2017 for the forthcoming Directors’ Report, brokers and TPIs advised firms to ensure they have maximum flexibility within their supply contracts to minimise risk and maximise opportunities to save as and when they arrive. That is likely to be on a daily basis, potentially more frequently; brokers unanimously warned that the days of taking a calendar approach to energy procurement are over.

“You have to be always on, market-driven and act on what it is telling you,” says Rahim.

The Directors’ Report polls directors and managers on their approach to energy and water. It also provides a snapshot of key risks and opportunities for the year ahead and will be available to download next week.

Correction: this article originally stated power price lows of £13.50/MWh and highs of £270, which is inaccurate.

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