Impact of COVID-19
The impact of COVID-19 has created unprecedented economic and social consequences globally. COVID-19 has significantly affected all aspects of life, including the energy sector. Though we are nearing the end of some economic and social restrictions, the consequences may have indelibly impacted the behaviour of the energy market. Fortunately, there are tentative signs of an economic revival as businesses begin to resume operations, which means many could now capitalise on the developments on the energy market.
Commercial activity has been curtailed for many businesses and firms since the UK’s lockdown, with the Organisation for Economic Cooperation and Development forecasting an alarming 11.5% slump in UK GDP, greater than the falls in France, Italy, Spain, Germany and the US, the Paris-based think-tank said.
The new reality compels businesses to better manage costs and energy behaviour to secure their futures or risk financial damage as we begin the post COVID-19 recovery. The time afforded to businesses as a result of lockdown has been a great opportunity to regulate and scrutinise commercial operations to identify and remedy inefficiencies.
This report looks at how the energy market has been affected, and what businesses are still able to do to capitalise and manage energy and energy expenses efficiently.
Is it appropriate to buy energy now?
COVID-19 has caused companies in the UK to urgently review their operations in order to maintain financial stability through months of inaction. The Furlough scheme, business grants, VAT deferrals and interruption loans have gone some way to protect businesses, but a more obvious and straightforward solution has been neglected: the cost of energy.
Often overlooked, energy costs constitute the single most critical supply element for the smooth output and operation of any business, especially in services such as the industrial sector. Energy costs for the manufacturing industry often represent the second or third highest expenditure, after labour costs or materials. Manufacturers have saved money through the lower demand for materials, and government-sanctioned financial assistance has relieved some payrolls, but what is being done about energy costs?
The global energy market is currently sitting at a 70-year low. Some perceptive energy managers have managed to capitalise on this by locking in long-term fixed energy contracts at a heavily reduced premium, allowing them to budget and forecast responsibly over the long-term with discounted energy rates.
Live data from wholesale energy markets indicate that the grid is struggling to manage a massive oversupply of electricity and is also facing difficulties in depositing the excess supply, leading to UK electricity markets plunging into the negative 66 times. The data would indicate that securing a new, long-term energy deal in this market could give businesses a financial advantage over idle competitors as we begin an economic recovery.
Why should I buy energy now? Is it the right time to buy energy?
Global economic uncertainty has led to a collapse in the demand for energy. With the lower demand, energy prices have fallen considerably. Data from wholesale energy markets, trading in Megawatt Hours, indicate the true imprint of COVID-19 on energy markets. Energy markets peaked at £68.27 per MWh in 2019 but have now dropped to as little as £42.67 per MWh in April 2020 – a colossal decrease of 35.5% in price. The recent imprint COVID-19 has left on the UK energy markets can be seen in the radical decline below:
Energy prices have plunged to record lows.
[Source: Northern Gas and Power]
Why is this happening to the energy market?
As suppliers struggle to sell viable quantities of energy in the current climate, we can expect the low energy price trend to continue well into mid-to-late 2020.
As well as the lack of demand, the steep drop in prices in the energy forum is down to the immense inventories of gas supplied to the global market with larger UK businesses reaping the rewards. Record hauls of gas are flooding the UK market from Qatar, Russia and the US. Analysts predict gas contracts are expected to fall by up to 30% in 2020 as the UK expects to receive an energy surplus at record levels.
Russia, Europe’s largest gas supplier, sustains its colossal flow of gas to Europe in order to establish market dominance and obtain a stronger economic foothold in the gas extraction industry. In March 2020, Gazprom (Europe’s largest gas supplier) celebrated the highest-on-record share of the gas market, at a commanding 36.7%. Gazprom is keen to maintain its control of the market and has pledged to fight off challenges from the US and Saudi Arabia by continuing its generous flow of energy into Europe.
Will the market recover?
The market is beginning its recovery. Recent government easing of economic restrictions will see a demand for energy rise, leading to the inevitable increase of energy prices towards previous levels.
Similar to the 2008 recession, greater economic activity and adaptations in financial policy will help to stabilise global markets. Some financial reports even indicate that UK GDP could return to positive growth of 4.5% by 2021.
Summary:
• Commercial activity declined sharply from COVID-19 onset, reducing demand for energy
• Lack of energy demand and excess energy supply resulted in market crash; energy markets currently at 70-year low
• Consequently, energy prices now heavily reduced; reviewing energy contracts now may lead to future savings
• Economic recovery expected by 2021 – prices on wholesale markets may stabilise within 6 months
• Energy consumption patterns must be analysed to eliminate inefficiencies
I’ve read the data, now what should I do?
To capitalise on the condition of the energy market, businesses should review their energy contracts now. Reviewing quotes on the market from suppliers may lead to significant savings going forward. The window on this opportunity may be closing as the economy begins to recover.
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