Gas procurement: Prepare to weather seasonal storms

When Storm Emma met the ‘beast from the East’ widespread freezing temperatures and extreme weather conditions gripped the nation and caused a panic energy buying spree. On Thursday 1st March National Grid warned that the UK might run out of gas via a ‘gas deficit warning’ as the market attempted to meet public demand, resulting in prices for within day delivery rising nearly 400% to their highest in 20 years. It showed the high level of impact that this kind of unseasonal and volatile weather event can have on businesses’ gas purchasing – a lesson on the importance of being prepared for every eventuality. 

In these circumstances, the businesses that are likely to be the most affected by weather induced sudden price rises are those on flexible purchasing contracts that haven’t hedged their gas usage in advance. It’s important for energy buyers to understand that any gas being consumed that has not been hedged in advance will be subject to these sudden price hikes when the weather leads to demand outstripping supply.

Price spike 

On 1st March, the media reported that industrial businesses and large gas users might experience interruptions and losses in supply in order to balance the energy market and meet consumer demand. While this may be unavoidable it’s something major energy users should forecast for as a potential seasonal risk. As it turned out, on this occasion a gas deficit emergency was not actually declared, but large industrial gas users were still challenged with high prices at short notice. This is a good reminder of how being more agile as a business could help to reduce gas consumption and therefore costs when prices rise. 

We have already seen the impact of these price spikes on domestic customers with British Gas announcing a 5.5% increase in prices, shortly followed by EDF announcing a 1.2% rise. However we may not have seen the end of price increases to customers. Independent suppliers that did not, or could not, purchase their gas requirements before 1st March will undoubtedly feel the pinch and will need to make some big decisions over the summer.  

Forces of nature such as those experienced by the UK earlier this year turned out to be the first big energy security challenge since the closure of Rough, the UK’s largest gas storage facility, last year. This previously provided an essential back up in times like these. Reports stated that the UK needed to import 1.75 billion cubic metres (bcm) of additional gas for the winter, sourced mostly from mainland Europe and Qatar. This increased reliance on gas from outside the UK could lead to a price premium especially during periods of high demand. This also has the potential to exacerbate future gas supply issues during times of demand increase, impacting both price and availability for some businesses. 

This highlights the importance of either flexible forward energy buying or the positives of choosing a fixed contract to protect against risk. The past few months in particular have seen some seasonal events that have clearly had an impact. Understanding what’s behind changing energy prices could be a useful measure in planning for future costs and needs, knowing how your energy contract could be affected by the weather could potentially save your business a large some of money.