Utilities Market Knowhow!

As of the 11th June, Gas and Electricity Year Ahead Wholesale costs have decreased when compared to last month’s report, although there has been considerable volatility within the month.

Oil is down slightly at $76, from last month’s $77. However, recently Oil reached $80, adding pressure to Gas and Electricity Wholesale costs. Several factors are responsible for this, including, an increase in demand from Asia and the reduction in production from the Organisation of the Petroleum Exporting Countries (OPEC) and Russia. The US decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) has also added a degree of nervousness, with the potential to restrict Oil exports from Iran. Venezuela has also significantly reduced exports. OPEC has hinted it may increase production to replace lost supplies, easing market pressure, as have increases from the US.

Disruption to Coal supplies from Australia and a high demand from India and South Korea, have pushed prices higher. This is an expensive form of generation, contributing just 1% in May. Further potential supply restrictions ahead, cast doubt on any short-term reductions.

Due to contractual links, Gas has been closely following Oil. Storage levels are still low after the cold spells. Warmer, windier conditions should reduce the Gas demand for generation and ease prices, as will the resumption of LNG deliveries, which were heading to Asia during the winter.

As 44% of generation came from Gas in May, Electricity was heavily influenced by Gas prices. However, despite the modest Renewables in May, the National Grid have commented, that this summer, we may have surplus supplies of Electricity, due to periods of excessive Wind and Solar.

What does this mean for me…

Favourable conditions for Renewables should see a reduction in Gas used for generation, lowering Electricity costs and also reducing Gas demand. The lower Oil price is factoring in the potential increase in production from OPEC, to alleviate supply concerns. They meet on the 22nd June. If they fail to deliver, Oil, Gas and Electricity are likely to be volatile.

There is little evidence of considerable reductions in the short term, so these contracts should be reviewed now. For those further out in 2018, we would advise being ready and monitoring closely.

The impact of higher third-party costs is increasingly noticeable in Electricity contracts. These include Transportation, Distribution and government policy levies. It is estimated that the Wholesale element makes up just 42% of the Electricity bill and that is excluding the supplier margin, metering and VAT.

Should you require further information, contact your lpm Estates Manager.

Life Property Management work closely with utilities broker Indigo Swan, to bring the best energy rates to their clients. Indigo Swan’s Market Knowhow is a regular, comprehensive report on the position of the Utilities Market.

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