Large energy consumers always want to know what’s going to happen to energy prices in the coming months and year.
While, of course, we cannot answer this with absolutely certainty, we can be sure about one thing – volatility looks set continue. On that, all the market professionals on our Optimisation desk agree.
The majority also believe that we’ll see a mostly bullish market in 2018. (You can find out how to read their in depth analysis at the end.)
Drivers for volatility
Volatility is being driven by the UK’s increasing dependency on imported gas supplies as well as instability in other fuels and a reactive pound, as Brexit negotiations continue.
The price of oil looks set to continue steadily rising, which will hike up the cost of other fuels. And while increases in UK renewable generation could exert some downward pressure on power prices, this too will add to the volatile picture.
Winter weather a key factor
This winter has so far been colder than previous years, and that obviously impacts gas and power prices.
But the forecast for the rest of Q1 is potentially more snow in January followed by a milder February, so prices could increase then ease off as we move towards spring.
Challenges in balancing power demand
Balancing power demand is a key factor in power prices, and National Grid has increased the volume of DSR it procures from balancing schemes, with a growing number of large consumers participating.
However, we are also dependent on the power imported via interconnectors to manage peak demand, especially from France. With continued uncertainty regarding French nuclear capacity, this may cause some spikes in the market if anticipated power imports are interrupted, as has happened in previous years.
Longer term, the growing numbers of electric vehicles on the road are expected to increase peak power demand, unless charging requirements can be managed away from times of peak national usage.
Shock events create more turbulence
By their very nature, shock events cannot be predicted. But we do know there are risks in the following areas:
• An increase in unrest in the Middle East could push oil prices higher
• Further impacts to European gas supply (for example, due to Groningen production caps)
• French nuclear availability (inspections continue)
• Relations with Russia
Developments in any of these areas will contribute to further turbulence in the energy markets.
Robust risk management is key
Ensuring you have an appropriate and robust risk management strategy in place to weather these uncertainties is key.
So if you think your current approach needs reviewing, our Optimisation Desk experts will be only too happy to provide some support (contact them via Optimisation.Desk.Team@npower.com).
In the meantime, you can read their analysis for the year ahead in our new 2018 UK Wholesale Power and Gas Market Outlook. Market expert Ben Spry will be posting a new forecast each day from all five Optimisation Desk team members on LinkedIn.