In today's unpredictable energy landscape, business owners need a clear understanding of how wholesale energy costs work and how recent price volatility impacts their operations. Energy is a significant overhead for most businesses, and choosing the right time to renew an energy contract can be a strategic decision that saves money and stabilises budgets.
Let's dive into wholesale energy pricing, the causes of market volatility, and how to navigate the complexities of contract renewals during uncertain times.
What are wholesale energy costs?
Wholesale energy prices are the rates that energy suppliers pay for electricity and gas before adding margins and selling them to businesses and consumers. These prices fluctuate based on various factors, including supply and demand, fuel costs, geopolitical events, and weather patterns.
Unlike fixed-rate retail contracts that most businesses and households use, wholesale energy prices are variable and can change every day or even every hour.
As a business owner, you indirectly pay wholesale energy prices through your supplier—so when wholesale costs rise or fall, it can affect the price you pay when your contract comes up for renewal.
Why has energy market volatility increased?
In the past few years, we have seen volatility in energy markets, with prices spiking to record levels. Some of the main drivers of this volatility include:
Global energy supply disruptions
Events such as the Russia-Ukraine conflict have caused disruptions to natural gas supplies, especially in Europe, which has historically relied heavily on Russian gas. This supply shortage has caused significant price hikes and uncertainty in the market.
Rising demand for energy
As economies recover from various issues, demand for energy has surged, especially in industries like manufacturing and logistics. However, supply chains are struggling to keep up, putting further upward pressure on prices.
Weather-related factors
Unpredictable weather patterns, such as harsh winters or long heat waves, can increase demand for heating or cooling, driving up the wholesale cost of gas and electricity.
Transition to renewable energy
The global shift towards renewable energy sources is a long-term positive for the environment but also introduces short-term market fluctuations. Renewable energy sources, such as wind and solar, can be less predictable than traditional fossil fuels, creating volatility in energy supply.
How volatility impacts business energy contracts
When the energy market is stable, it’s easier for businesses to predict their energy costs and plan. However, during periods of volatility, prices can fluctuate wildly, making it harder to determine the best time to renew or secure an energy contract.
Fixed vs. variable contracts
Most businesses opt for fixed-price contracts, where energy rates are locked in for a set period (usually 12, 24, or 36 months).
This protects businesses from sudden spikes in wholesale energy costs. In contrast, variable contracts fluctuate with market prices, which can offer savings in a falling market but increase risk during price spikes.
Higher renewal rates
Due to recent market volatility, businesses that are due to renew their contracts may find that rates have risen significantly compared to their previous contracts. Many business owners face the challenge of locking in rates during a period of high prices or waiting and hoping prices will fall in the near future.
When should business owners renew their energy contracts
Timing your energy contract renewal is crucial, especially in a volatile market. Here are a few strategies to consider when navigating renewals:
Start the renewal process early
Business owners should monitor the energy market well before their contract’s expiration date. Many energy suppliers allow customers to lock in a new rate up to six months in advance. This can provide flexibility to take advantage of any dips in wholesale prices.
Consider a blended approach
In volatile markets, some businesses opt for a mix of fixed and variable contracts. This approach allows them to hedge their bets by securing a portion of their energy needs at a fixed rate while taking advantage of potential drops in market prices with a variable-rate portion.
Work with an energy consultant or broker
Energy consultants can help you navigate the complexities of the market, identify opportunities, and find the best rates. They have access to wholesale market data and can advise on the most opportune time to renew or switch contracts. A broker can also help negotiate better terms with suppliers.
Monitor market indicators
Keep an eye on key indicators that affect wholesale prices, such as geopolitical developments, natural gas storage levels, and weather forecasts. By understanding these trends, you can make more informed decisions about when to secure a new contract.
Flexible contracts for short-term volatility
If you're concerned about locking in high prices during a volatile period, you might want to explore flexible contract options. Some suppliers offer "tracker" contracts where your rate is tied to wholesale prices, allowing for potential savings if the market stabilises or drops within a year.
Long-term considerations: sustainability and energy efficiency
While navigating contract renewals, it’s also essential to consider the broader trend towards sustainability. Businesses that invest in energy efficiency, renewable energy sources, or even on-site generation (such as solar panels) can reduce their reliance on the wholesale energy market over the long term.
These strategies not only help shield your business from market volatility but also align with growing regulatory pressures and consumer demand for sustainable practices.
Key Takeaways for Business Owners
- Understand how wholesale energy costs influence your bottom line. These costs are driven by global events, weather, and supply-demand dynamics.
- Market volatility is high right now, making it challenging to know when to renew energy contracts. However, careful monitoring and early action can help mitigate risks.
- Locking in a fixed-rate contract during a period of volatility offers stability, but you may face higher rates than in previous years.
- Consider working with energy consultants to navigate the market and ensure you’re making informed decisions based on the latest data.
By being proactive and informed, business owners can better manage the financial impact of energy costs and make strategic decisions that protect their bottom line during these turbulent times.
Navigating the wholesale energy market is not an easy task, but with the right strategy, timing, and expert support, businesses can weather the storm of market volatility and optimise their energy costs for the future.
If you're looking to save money on your energy bills then why not get in touch today? The relationships Resolve Energy has developed with over 24 of the UK’s biggest business energy suppliers allows our energy experts to source the best business energy rates available for your company right when you need them. Request a free quote today and start saving money on your energy.
