Businesses are being warned to plan ahead and lock in energy deals as the cost of carbon and gas will continue to soar leading to fears of a costly winter, according to a forecast by utilities broker DB Group (Europe).
Recent weeks have witnessed a global surge in demand for gas which has put pressure on prices and suppliers.
Exacerbating the already sky-high market rates, a fire at the National Grid’s IFA-1 interconnector knocked out supply last Wednesday, with repairs expected to take around six months. The increased risk could not come at a worse time, with a potentially cold winter and low renewable output forcing the Grid to balance the lost outlook from already squeezed resources. Prices jumped more than 10% on the day.
Ahead of the COP26 summit in Glasgow in November, with clear market signals to transition and renewed climate pledges as well as low stocks, DB predicts carbon prices will continue to notch new records also.
The push to switch away from heavy polluters such as coal and oil to natural gas and renewables will also contribute to gas prices rising as global demand outpaces supply.
Linlithgow-based DB Group, which monitors and produces reports on energy markets on a daily basis, forecasts that carbon could rise to as high as €70/MT by the turn of the year.
Carbon now trades over 110% up year-on-year and DB expects rising costs to continue.
Catriona Lindsay, Pricing Analyst at DB Group, said: “Ultimately, based on current information, we foresee the end of this year looking very different from the beginning.
“In our annual energy report at the beginning of 2021 we forecast that record carbon credit prices, soaring Liquified Natural Gas (LNG) and impacted storage levels would see in higher gas and electricity prices throughout 2021 and that is what we are experiencing, with that trend set to continue.
“As predicted, the cost of carbon surged, with prices rising ahead of the European compliance deadline (where relevant companies must have enough credits to cover excess pollution or otherwise face massive fines) and again in the summer ahead of the launch of the UK’s own carbon credit system and European ETS reforms.”
Power prices, at present, are up an increase of 164% year-on-year, up 132% since February.
DB Group, which offers bespoke procurement strategies that can help mitigate soaring energy costs, has advised all its customers with an end date within the year to procure and lock in contracts in February 2021 via a renewal letter drop, ahead of what they had expected to be a “brutal summer”.
It saved one Edinburgh business almost £100,000 alone this year. Following the letter drop, George Heriot’s School in Edinburgh agreed to lock in prices in April. If they had waited until September, the energy price rise would have cost them an additional £93,000.
Tim Partridge, Head of DB Energy, said: “We had a great response to the letter drop, all things considered. We were aware of the troubling times the lockdown would bring to businesses and their utility contracts were probably the last things on owners’ minds. But the idea was to ensure that when lockdown was easing our clients didn’t have to worry about really high tariff rates on top of everything else.”
It’s not just customers who are feeling the pinch – in the last 18 months, several major suppliers and brokerages have collapsed.
Natural gas storage inventories across Europe were also at unprecedented lows, with competition for LNG cargoes across Eurasia remaining strong.
The window for buying in gas ahead of the tough winter season is narrowing, and it seems likely that gas prices – already at record highs and up 1300% from May 2020 – will continue to climb.
Difficulties for suppliers are expected to continue, with Renewable Obligation Certificates attracting a 2.5% increase this year.
An increased reliance on natural gas driven by fuel-switching, combined with low storage levels DB says, “creates the conditions for a costly winter ahead”.