Price spike shows risks of cold snap on UK power prices

The Advice Last month’s price spike after a cold snap reminds us of the sensitivity of prices to harsh weather early in the winter, according to a monthly price risk […]

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By Geoff Curran

The Advice

Last month’s price spike after a cold snap reminds us of the sensitivity of prices to harsh weather early in the winter, according to a monthly price risk prediction from BuyEnergyOnline. Experts at the online energy market for businesses buying electricity and gas warn firms should use a “harnessing strategy” to benefit from cheaper spot prices while reducing risks from unexpected price shocks.

Globe watch: need-to-know background

In the run up to the United States’ presidential election it was all about America this October. At first there was positive news from the US, with unemployment falling to a 44-month low of 7.8%, improving property markets, retail sales, consumer confidence and a 2% annualised GDP increase for Q3.

But later in the month, business earnings and confidence “dropped” resulting in a small share market correction. The all-important ‘fiscal cliff’ still concerns financial markets and economists who are waiting until after elections on 6 November to see how it will pan out.

Norway had some issues with gas production during October while reduced LNG supplies were diverted from Qatar to Asia where much higher prices are secured, all of which meant the UK experienced “tight” gas supplies.

What happened with energy prices?

Positive US economic data and a short-lived cold snap in the UK saw a “price spike” in October, said Derek Myers, the head of BuyEnergyOnline: “There was a price spike last week following forecasts of a cold snap that only materialised for 24 hours. Prices are very sensitive to cold snaps early in winter which can use up the reserves required to mitigate risks during the typically colder months after Christmas.”

The price rises from positive US economic data were “held in check” by the looming US fiscal cliff, he suggested.

Mr Myers added: “UK energy prices trended higher during October with gas prices ending up 2.6% at 2.21p/kWh and electricity prices up 1.9% higher at 5.61p/kWh. Oil prices eased 2.3% to $109/barrel, coal prices were 3% lower at $86/tonne and carbon permits rose 3% to €8.23/tonne.”

The Prediction

“Prices should ease as global economy is unlikely to recover with US economic problems overhanging the market. A prolonged cold snap over winter will remain a substantial risk although unlikely to occur.” advises BuyEnergyOnline.

Mr Myers added: “Wait as long as possible to lock away fixed prices for no longer than 12 months or use a flexible purchase contracts to ride the market lower by buying on a month-ahead or day-ahead spot basis. Use a harnessing hedge strategy to take advantage of price falls, while reducing risk exposure to surprise shocks to the energy markets”