Welcome to the first edition of our monthly energy market update for 2023.
Last week the government announced details of the new Energy Bill Discount Scheme, which takes effect from 1st April. In this month’s Energy Market narrative, we examine how the new scheme will impact UK business when current support ends, and contextualise against falling wholesale prices.
The Energy Bill Relief Scheme (EBRS) is set to expire on 31st March and last week the government announced detail of the Energy Bill Discount Scheme (EBDS) that will take its place. The EBDS will run for 12 months from 1st April and the eligibility criteria remain consistent with the previous scheme. However, the levels of support are much reduced and this time there is no hard cap on what businesses will be charged for the commodity element of their bill – this has instead been replaced with a maximum discount.
So, let us look at support for electricity prices under the EBDS. If the commodity price is above £302/MWh at the point your contract was signed, you will be eligible for a discount, up to a maximum level of 1.961 p/kWh. Should energy prices spike, such as they did in August 2021, the government will no longer be writing a blank cheque on behalf of the taxpayer. However, it is worth noting that markets have been falling since then and Winter-23 baseload power is currently trading at around £190/MWh, meaning the EBDS will not apply to a contract signed today.
The EBDS gas discount is similarly structured. If the commodity price is above £107/MWh at point of contract acceptance, then a discount of up to 0.697 p/kWh would apply (the maximum gas discount). The market is currently at less than 60% of this level, so EBDS would not apply to a new gas contract signed today.
However, for a customer who signed a contract when wholesale prices were peaking on 1st September 2021, they would be losing a significant proportion of the discount they currently enjoy under the EBRS. Such a customer would currently be receiving a huge discount of 46.67 p/kWh from their electricity bills, which would fall to the maximum discount of 1.961 p/kWh from 1st April under the new scheme. So better news for the UK taxpayer, but less so if you signed your business energy contracts when markets spiked last year.
Natural Gas Prices
In last month’s edition, we reported on the downward trend in energy prices, and this has continued into 2023. We have seen markets further softening early this week, despite the colder weather. The same themes continue to drive this downward pressure; overall milder temperatures, strong LNG deliveries, and healthy gas storage across Europe.
The below graph tracks movement in gas wholesale prices across the next two winters:
Prices are lower now than prior to Russia’s invasion of Ukraine. The high levels of European gas storage inventories have seen Summer-23 prices reduce, as there will be far less pressure than expected in the early gas injection season. And the unexpected relative ease with which Europe has navigated this winter has caused bearish sentiment around Winter-23 prices. Last week saw reports from the US that the Freeport LNG terminal will not reopen from the end of January as expected, but even this news could do little to halt the downward momentum of prices across European hubs.
The above narrative is echoed across power markets, with strong winds in early January boosting wind generation and further reducing gas-for-power demand. The following graph highlights price movement across the Winter-23 and 24 baseload contracts:
Elsewhere, EDF has announced this week further delays to their returning nuclear fleet, with 2.5 GW of capacity affected. Prices continue to nudge downwards early this week, despite this news.
It seems to be mostly positive news in early 2023. Some sectors remain critical of the government for not going further to avoid the so-called “cliff edge” as existing price support ends in March. However, last week’s EBDS announcement does remove some of the uncertainty surrounding energy costs for the next year, offering reassurance to business owners and investors.
How much further wholesale prices will fall remains the subject of much speculation. Most commentators agree we are very unlikely to see markets drop to pre-pandemic levels, perhaps never again reaching that point. And the apparently fragile nature of world politics leads many to anticipate continued volatility across at least the next two years. We cannot forecast with any degree of certainty, but for now it seems market fundamentals are on our side. BMU is here to support with an array of services designed to minimise the impact and stress of your energy renewals, so do contact us on 01484 506 410 if you need some help.
If you'd like more information about current market conditions or would like specific advice with your specific business needs, please don't hesitate to get in touch with us.