There has been a shortage of gas across Europe, and the UK has less gas storage capacity than in previous years; wind generation has been low; high interconnector capacity costs after Brexit and price decoupling from the larger European pool that could act as a price stabiliser; and some generators sitting out the wholesale market to get higher prices in the balancing mechanism.
If you then consider the fire at the French interconnector last week – that will be offline for a week and at half capacity for 6 months – we can expect a volatile winter, especially if it is cold.
Reduced competition in the market place
Four suppliers have exited the market in the last week, which means we expect the UK consumers under their remit will be allocated back to a larger supplier. Two sets of customers have already been assigned to British Gas, and it is likely that other suppliers will fail. Additionally, Ofgem’s price cap is stopping suppliers from increasing their prices above a certain level, which means they may have to sell power at a loss.
Ultimately, this means that there will be fewer suppliers in the market and fewer new entrants, which will lead to less competition in the market and a potential return to the domination of larger suppliers.
Ofgem, the regulator in the industry, mandated a price cap which is set twice a year: in the short term, consumers will not see their price go above the price cap.
However, due to expected supplier losses under this price cap, we would expect to see more suppliers fail. This would result in less competition and innovation across the market, which means that there will likely be fewer opportunities for future savings to be made.
With the drive away from ‘dirty’ coal and the current high costs of gas, both of which provide a stable baseload of energy, investment in solutions to manage complex and less stable levels of energy price and production are required. Fewer players in the market to innovate and volatile conditions for investment are therefore a concern.
Author: Alex Troth, Commercial Director at Seaglass Cloud Technology, an end-to-end software as a solutions (SaaS) provider to the energy industry, provides insight on why energy prices have risen so dramatically and what it means for the industry.
