Last year was the UK’s warmest since Met Office records began in 1910, a fact that was reflected in falling forward prices, which are likely to remain on a downward trend in the first quarter of 2015.
Lower demand means gas storage facilities remain in good shape to address colder weather – a similar pattern to last winter, when forward “risk premiums” were steadily eroded into the summer.
The other key bearish influence on energy costs is, of course, plummeting oil prices. In January, Brent crude oil traded at a six-year low, dropping to less than $50 a barrel.
While wholesale power prices remain largely driven by the underlying gas price, new environmental levies are ramping up under Electricity Market Reform and savings could easily be eroded by these charges, especially in forward periods.
We believe the downward trend won’t bottom out until winter ends and suggest that commercial customers with flexible contracts buy in a small percentage of their 2015 exposure, but hold off the majority of their buying until the end of Q1.
Fixed price buyers have more limited options, but power and gas are moving in concert, so one tactic would be to hedge by buying power soon on a short-term pass-through deal, leaving the gas contract open longer.
Speed of response when the market turns will be critical. Everyone is trying to judge the bottom of the market, so suppliers will be inundated with tenders when the time comes.
Peter Pharoah, head of energy markets, ENER-G Procurement