Well, we never thought we would say this but, for energy consumers, the energy price cap is finally working (for now). Yes, you have read that correctly. The Energy Price Cap is finally having its day.
Not because the energy price cap is, or ever was, a good idea. It is just that there are highly improbable, long-tail scenarios (which no one ever expects) where the price cap actually works (temporarily in any case). We are in one of those scenarios now. That event is the relentless increase in European wholesale gas and electricity prices, which is particularly acute in the UK.
According to ICE, the UK Natural Gas futures contract for Winter 2021 has not just doubled, or even trebled, but has risen more than fourfold over the past 12 months.
Even over the past 5 weeks, since the latest energy price cap was announced on 6 August 2021, the increases have been staggering.
Wholesale energy price increases over the past 5 weeks are, in percentage terms, roughly similar to those of the preceding 6 months (give or take). However, when it comes to the calculation of the energy price cap, it is absolute price levels that matter. And the shocker is that the level of wholesale energy prices has increased by twice as much in the last 5 weeks as it did in the 6 months prior. The simple maths implies that, as things stand, the next level of the cap will increase by around £275-£280 (2 times £139). This would take the energy price cap, when it is next reviewed, and increased, on 1 April 2022, to around the £1,555 mark.
To put that into context, price protected standard tariffs would be 50% higher than they were 2 years prior. They would be TWICE the level that the cheapest tariffs were last summer (June 2020).
This consumer price shock has yet to come, but it will hit consumers in the next 6 months. The more immediate impact is felt in the competitive market where energy suppliers use wholesale prices to price and hedge their "cheap" energy tariffs before offering them out for sale. Here the impact has been severe and un-precedented. "Cheap" discounted tariffs have all but disappeared, as have a number of the energy suppliers offering them.
Research from energy price comparison site The Energy Shopshows the following.
If the impact on energy consumers looks dire, the impact on certain energy suppliers has been swift and brutal. Caught between having cheap fixed price tariffs sold to their customers, and rapidly rising input commodity costs, suppliers who have not fully hedged their input costs have found themselves facing immediate financial ruin.
In the past 5 weeks alone, 5 energy suppliers have ceased trading leaving 665,000 customers looking for a new home for their energy. This is the fastest rate of supplier failure since the energy market was deregulated. Worryingly, the pace looks to be accelerating.
In a highly uncertain market, we are not going to pretend we know what is going to happen. As that great basketball coach, Yogi Berra, once said. "It's tough to make predictions, especially about the future'".
Having said that, there are only 3 possible ways this can pan out.
Over the longer-term markets are self-correcting mechanisms. One would therefore expect that today's extreme price signals will lead to increased energy supply that will, in turn, address the supply / demand imbalance leading to lower prices going forwards. Indeed, certain factors creating the current imbalance (nuclear plant maintenance shutdowns, low wind generation) are temporary and will at least partially ease the situation. Others, including restricted gas flows from Russia and negligible LNG arrivals in Europe due to Asia demand, are more difficult to call. Even if, or when, wholesale energy prices do start to turn downwards, there is still much uncertainty as to how far will they fall and when this will happen.
The consensus currently emerging (which means it may not happen), is that the supply situation will remain tight and precarious over the coming winter (2020/21) leading to high and volatile energy prices. Thereafter, supply / demand should be more in balance with prices easing from spring 2022
In this scenario we would expect to see some or all of the following;
Joe Malinowski, founder of energy price comparison website TheEnergyShop.com commented....
"The current energy market has been turned on its head. It is no longer about optimizing your energy spend, it is now a question of protection andsurvival - literally. If you can find a fixed energy deal anywhere near the level of the 1 October 2021 energy price cap, just take it. It may not seem a good deal now but when energy prices rocket by another £280 next spring you will be glad you did."