There has been an immense amount of noise around the dramatic rise in energy prices, but an added issue to consider is the volatility of prices and the effects of this.
According to industry experts, prices were more volatile 2 years ago than they are now – difficult to believe, right? However, when you consider the impact of volatility in monetary terms, then it’s anticipated that the risk costs will be much more significant now than ever before, and notably since prices are approximately 5 times greater. As an example, volatility of 30% 2 years ago might have resulted in the occasional price spike of £50 MWh to >£100 MWh. Applying that price hike now would lead to a cost of £200 MWh to >£400 MWh….
Historically, a pretty accurate assessment could be made of the credit assessment price, but not now, due to the volatility of the market that we are experiencing. This makes energy pricing incredibly challenging for businesses.
These high energy prices are, in some cases, are crippling companies - the price differential between baseload and peak prices has reduced considerably. For example, over the first half of 2022, this is just over 8% on the day ahead prices, in short, not a lot. Near term forward prices show a similar differential. However, in October 2021, the difference between base and peak prices was 24% the day before expiry. This is a good example of our inability to predict prices, with off-peak prices on average of £161.80 per MWh.
There are three ways a business can try and manage the volatility of energy prices:
If you have standby energy facilities, now could well be the time to use it. As a merchant plant, why not look to turn the energy you are generating into a revenue stream? This could help reduce the impact of price swings.
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There has been an immense amount of noise around the dramatic rise in energy prices, but an added issue to consider is the volatility of prices and the effects of this.
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