We take a look at the current energy market conditions and what we know about the new Energy Bill Relief Scheme
In this month’s Energy Market Narrative, we review what is currently known about the Energy Bill Relief Scheme following Wednesday’s government announcement and discuss whether now could be a good time to lock in contracts following recent downward pressure on wholesale markets.
The Energy Bill Relief Scheme
For business energy customers the big talking point this week is inevitably the press release from the Department for Business, Energy and Industrial Strategy (BEIS) which has provided us with detail of government support across this winter. The Energy Bill Relief Scheme (EBRS) will be automatically applied to bills for eligible customers for usage from 1st October. Eligible customers are those who signed a new fixed contract since 1st April or are about to do so. There is also support for customers on deemed or out of contract tariffs, albeit you would still be paying significantly more for your energy if not in contract due to a “maximum discount” that will apply to these groups. So how does the scheme work? Well, BEIS has proposed a “Government Supported Price” which will replace the estimated portion of your unit rates that is comprised of wholesale costs. The Supported Price for electricity will be set at £211/MWh and for gas at £75/MWh. Detail is yet to be provided to energy suppliers, but we expect they will add a line item to your bills to apply the discount at a p/kWh rate for energy consumed in the period. The discount will reflect the difference between the Supported Price noted above and the commodity cost on the day you fix/fixed your contract. What does this mean in real terms? Let’s say you sign an electricity contract based upon a wholesale cost of £450/MWh. In this scenario you would receive a discount on your usage across the winter months of 23.9p/kWh (£450/MWh minus £211/MWh converted to p/kWh). Of course, for customers who signed contracts prior to the significant spikes in wholesale prices from June onwards, the discount will be much lower than those who signed during the peaks of late August.
Natural Gas Prices
The below graph highlights movement in winter-22 gas prices versus the governments proposed Supported Wholesale Price, and the table provides a market snapshot at close on 21st Sept:
In addition to highlighting the varying differential to the Supported Price, the graph clearly shows the spike seen in commodity costs around the end of August.
This was largely driven by Russia’s cessation of flows via the critical Nord Stream 1 pipeline. However, we saw a subsequent reduction in prices, and record losses were posted across the curve as traders closed out their positions. The downward movement not only reflects the market finding its level after a bullish month, but was also driven by EU gas storage being filled to target levels approximately 2 months ahead of schedule.
Power prices continue to follow where gas markets lead. The below graph highlights movement in winter-22 baseload prices against the Supported Wholesale Price, and the table reflects market close on 21st Sept:
The downward pressure on both natural gas and power markets was halted somewhat following Putin’s announcement this week that he would be calling up 300,000 reservists to fight in Ukraine. But higher European prices have attracted increased LNG cargoes, with 23 ships expected to arrive across the continent by 26th Sept, and this should limit any increases in the near-term.
The EBRS is prompting cautious optimism across business communities, with many energy-intensive users having viewed energy prices this winter as an existential crisis. However, there is still much concern regarding the potential “cliff edge” in April when the scheme is due to end.
Energy suppliers will also welcome the intervention. They will be compensated by the government for the reduced prices they pass on to their business customers, which will significantly reduce the risk to their debt books this winter.
And so, the many customers who have held off renewing their energy contracts while markets spiral ever upwards will now be clamouring to sign on the dotted line. Although we still await further detail of the EBRS, including the governments index of wholesale costs since 1st April to be used in calculations, we can say with confidence that renewing contracts now would be far preferable to sitting at out of contract rates. And, even without the EBRS, winter-22 baseload prices have fallen by around £350/MWh since 29th August, making it much more palatable to renew now versus where many feared the market was headed.bm