Political uncertainty has been a major driver of market fluctuations and is likely to remain so this year.
The inauguration of a new US president, Brexit discussions, elections in Europe and unrest in Middle Eastern countries are all influencing already nervous markets.
The decision by Opec members and some other oil producers, including Russia, to cut production from 1 January added further upward pressure, a situation exacerbated in the UK by sterling’s weakening against other currencies, notably the dollar.
However, it remains to be seen how much production will actually fall under the agreement, which is due to last six months, and whether it will be offset by increases in oil and shale gas output elsewhere.
Oil stocks are high and this has limited the rise at the retail pump and farm level so far. Production data and exchange rate changes will continue to have a key bearing on prices for oil-derived products over coming months.
In terms of electricity, the link between wholesale prices and the prices charged to customers is less strongly correlated, according to Strutt & Parker’s energy engineer Kieran Crowe.
“Although the cost of producing electricity has increased recently, the prices that people pay hasn’t changed that much. Companies didn’t really pass on the full drop in wholesale costs seen over a year or so ago, so have been able to absorb more of the increases without raising prices.”
Wholesale prices only relate to around half of the typical electricity bill, with other non-energy items, such as environmental levies, transport costs, supplier margin and metering costs, making up the rest, he adds.
“Although wholesale prices may change, we don’t necessarily see that filter through to bills, so barring any dramatic events, I expect prices to stay relatively static for the foreseeable future.”
Energy market trends
- Oil prices hit a 13-year low of US$30/barrel a year ago – oil is a key driver of energy markets due to its importance in both electricity generation and refined products, such as petrol, diesel and heating oil (kerosene).
- Prices rose throughout much of 2016 and despite a slight drop in the new year, spot Brent crude has climbed to US$55 a barrel, with many industry commentators suggesting further rises are to come.
- Wholesale electricity and gas prices have seen rises of a similar scale over the past year, with electricity up from around £34/MWh to £56/MWh and gas from £30 to £50/therm.
- Rises in retail petrol and diesel prices reflect oil price increases, with both products up by about 15% over the past 12 months and red diesel up from 43p/litre to around 51p/litre on average.
- Although prices are still some way below the highs of 2011/12, when oil averaged more than US $100 a barrel and the cost of red diesel exceeded 71p/litre, the upward trajectory combined with already tight farm margins means an increasing number of farmers are seeking to reduce their exposure to future increases and suppliers are increasingly developing ways to do this.
Shop around for a good deal
Whether buying diesel, electric or heating oil, shopping around for quotes is crucial to get the best deal, especially during times of greater market volatility.
Mr Crowe says more businesses are buying electricity through an energy broker or other third party intermediary (TPI), as prices can be more competitive than those available directly from the supplier.
“Using a broker won’t necessarily guarantee you a lower rate, but given the rapid expansion of TPIs over recent years, the market is very competitive and is likely to be the cheapest way for businesses to source electricity in future.”
Prices can creep up when remaining with the same supplier for several years, so it often pays to switch, he says.
“Scrutinise any contract offering closely though. There may be a tempting day tariff, but check whether the night and weekend rates are equally favourable, as these can sometimes be higher. Also look closely at the standing charges, and metering costs if you’re on a half-hourly contract.”
With fluctuating prices, he says there may be a benefit from being on a variable price contract to take advantage of any potential price falls. However, he acknowledges others may wish to reduce uncertainty by locking into a fixed price.
“Either way, make sure you are in a contract; people very often see massive increases in prices when they come off a contract rate,” adds Paul Jesson, head of utility contract management at consultant FEC Energy.
“Fixing for one, two or three years can give some comfort and stability during times of greater volatility.”
The types of deal available vary all the time, so it pays to compare suppliers.
The main option for those with low to medium usage (spending up to £15,000 a year on electricity) is a standard fixed price contract that sets a price for typically one to three years, but maybe longer.
Larger energy users, typically those with half-hourly meters, should also consider negotiated contracts where a slightly better fixed price can often be negotiated directly with the supplier, Mr Jesson says.
Buying Group Anglia Farmers (AF) offers members fixed-price forward contracts for fuel and electricity and reckons members signed up to such deals save 2p/unit on electricity.
AF locked-in its electricity prices in October 2015, 12 months prior to contract renewal in October 2016. It says this allowed farmers to benefit from an average of 14% savings in their electricity bills.
Smarter energy use
The biggest potential saving for any business is likely to come from being “smarter” about when, where and how electricity is used to avoid times of peak demand (and therefore higher prices) and maximise electricity use at cheaper off-peak times, Mr Jesson says.
This requires closer analysis of electricity use and more accurate metering to identify the peaks and troughs in usage and highlight where there is scope to modify farm practices to avoid the more expensive periods.
Where there are multiple uses, a single meter can prevent accurate monitoring so multiple meters should be considered.
Many businesses, including larger farms with high energy demand, are being required to move onto half-hourly metering as part of an industry drive towards more accurate consumption predictions.
These P272 metering changes are ongoing throughout this year and affect any business with an electricity meter in profile class 05-08 – this can be identified from the Meter Point Administration Number (MPAN) on electricity bills.
Mr Crowe warns that the unit rate can be higher on half-hourly contracts, which also include additional meter operator costs.
It therefore pays to compare suppliers and also consider other meter operators beyond the electricity supplier.
“The electricity industry’s aim is to eventually move to a smart grid where suppliers are better able to measure electricity use and balance the system more accurately.
Smart metering is already being rolled out to domestic customers and eventually all businesses will move to smart metering.”
Accurate metering can provide a lot of useful information to help identify ways to modify electricity use to save money, he adds.
Forward buying fuel spreads risk
More farmers are forward-buying red diesel (gas oil) to reduce risk and improve budgeting during times of uncertainty, says Duncan Lambert of Rix Petroleum.
The firm offers various forward-buying options for any quantity over the 5,000-litre minimum order, with customers typically fixing 25-50% of their annual requirement as an insurance against future price rises.
One option is to pay upfront at the base price (47.25p/litre at the time of writing) and take delivery of fuel later in the season, when a delivery fee is added.
There is no limit on how far ahead people can buy, and deliveries can be tailored to requirements. However, storage is only free for the first six months; beyond this an additional monthly fee is applied.
Deferred payment packages are also available where farmers want to lock into a price but cannot pay all upfront.
“Most forward-fuel buying used to be done in June, pre-harvest, but the past three years have seen much more activity earlier in the year,” notes Mr Lambert, who adds that exchange rate fluctuations once the UK triggers Article 50 will be a key driver of future prices.
Anglia Farmers also offers a scheme allowing members to buy a proportion of fuel at a fixed price for up to two years ahead.
The firm’s recent AgInflation forecast predicted a 15.2% increase in fuel prices, including electricity, over the next 12 months.
- More forward price fixing schemes are on offer to put certainty into production costs
- Scope for smarter energy use, starting with closer monitoring of electricity use to identify opportunities to shift use into cheaper rate periods
- Consider using an energy broker to get a better deal
- Don’t be fooled by cheaper headline day rates for electricity – offers may hide higher rates at other times and out of order costs for services
- Metering services may be cheaper through someone other than your electricity supplier.