Has the price of Energy actually gone up??

Every year, around November/December, as the cold weather set's in suppliers tend to increase their prices. Perhaps because it's easier for people to understand the cold weather can be used as a scape-goat for the price rise...

For instance, today Npower raised their prices by 9%, and on 15th November Swalec's prices increase by a similar amount.

However, some suppliers still haven't followed suit?

So why is this- have the other suppliers already purchased their energy?

Do you need to act now?

Does the domestic price rise offer a market signal for your business energy purchases?

The truth is you need to be very careful when utilising the news of domestic price increases.

Particularly when using domestic price increases as a market signal or a trigger to consider your business energy costs.... if you're only considering your business energy bill because you've heard the news that domestic prices are going up you need to re-visit your purchasing technique.

The reason is all to do with how static the domestic market is.

When suppliers put together their tariff sheet's for homeowners they position their price to try and attract a certain amount of customers over a certain period.

They build in a risk premium to allow for market fluctuations during the period and also because unlike in the Industrial & Commercial (I&C) market they do not have a profile of how and when energy will be consumed (so the suppliers is actually taking some risk).

In the domestic market the price generally holds for a few months or more, and instead of varying the price to attract new customers the supplier offers different levels of "value add". This may be in the form of cash-back, a smart meter, online billing, or customer support to try and attract more clients.

In contrast, if you take a major energy user, they will be offered a price on a given day and it will only hold during that day if the market doesn't increase (meaning sometimes the price is only valid at that given moment).

For instance, when purchasing for some of our clients at amber energy the offered price is only valid during those particular seconds at which it's offered over a phone call to the suppliers trading desk.

This means that on any given day when you retrieve an offer for a major energy user it is a true reflection of the market conditions on that day.

The supplier has taken into account the wholesale traded price (bid or offer), the profile of the business, how much risk they are taking *including any credit risk, any government taxes or speculative increases in transportation costs etc etc.

So what does this mean when considering today's news?

Well put simply, it doesn't mean that the price of energy has gone up 9% across the board overnight!- far from it!

What it means is that the suppliers are no longer satisfied that the forthcoming market conditions that they are about to be exposed to are comfortable when considering their pricing sheets OR that they are simply moving into the next year of energy purchasing.

The first point is fairly easy to explain- as you move into a winter period a supplier will speculate on how 'tight' the balance between supply and demand will be and whether there are sufficient reserves etc.

Where reserves are eaten away, during cold snaps, the wholesale market can spike and increase the cost of supply. The reserves act as a buffer or an insurance against the cold weather forecasts; the lower the level of storage at the start of the winter period the higher the chances of volatility throughout the coming winter (so the higher the pricing risks).

The later point is a little harder to get your head around...Essentially, energy is a traded commodity. This means that it is being bought and sold every day in large quantities all around the world.

Some energy is purchased on what is called the "spot" market whilst other trading activity covers "futures".

The "spot" market is basically for delivery tomorrow or at some point in the next 30 days i.e. you are talking about the price of energy in close proximity of the time that you are purchasing it.

The "futures" market looks at the price of energy much further out. Typically trading 6 seasons out; a season being 6 months (Winter & Summer) so your normally looking at an active market 3 years out.

Today we're looking at Winter 2013 through to Winter 2016 for instance.

So when you think about it, because the supplier wants to offer a domestic energy price that holds for at least 3 months, & they also don't want to have to ever increase the price drastically later on, they are considering where the market has moved to since they last made a price offer & where the market is trading on the futures.

Currently the price of energy 2 years ahead is higher than the price 1 year ahead & the price of energy 3 years ahead is higher than the price 2 years ahead.

The differences between each year are around 5% and the government has recently increased taxes that apply to the total bill paid by around the same sort of percentage.

This means todays price rises are not because the market has 'shot up'. The price of energy for "this year" i.e. Winter 2013 and Summer 2014 are higher than those from last year i.e. Winter 2012 and Summer 2014 but they've been higher for the last 3 years that they've been available to trade.

So I've probably lost you by now... but if you are still reading what can you do in your house to control your energy bills?

Well the bad news is that the price of energy is going to increase for the next few years (likely through to 2020). The 'shale revolution' offers support for gas prices to fall but electricity prices will increase as a result of the electricity market reform.

The good news is that the suppliers premiums, currently charged to you, can be eaten away at by utilising a collective switching service.

We run these for small businesses and not yet for domestic customers. Essentially a third party gathers together letters of interest from domestic customers and then holds an auction to supply these customers.

A few councils have held collective switching auctions and I'd recommend considering an offer from a collective switching service if there is one available in your area.

If not, you will want to consider what suppliers are still offering their 'old' fixed prices and have yet to adjust their pricing upwards.

If it's been a large increase getting in ASAP and securing the longest term available will yield some security in your domestic bill and likely the largest contract term savings.

Remember to take some traditional best-practice actions; - Go direct to suppliers & don't just use comparison websites. - Consider dual fuel discounts and make sure you take advantage of direct debit discounts. - Find out how much energy you actually use (don't just use estimates) as otherwise you won't be able to work out which offer is actually best. - Try to get an early smart meter upgrade as this will support your cash-flow only charging you for the energy you use.

Once you've done all this, it's time to buy the cheapest unit of energy you can i.e. the one you don't use. Focus on efficiency savings you can make around your house; if you need some help there are some good guides on the Energy Saving Trust http://www.energysavingtrust.org.uk.

For someone to manage your business energy supply and to take advantage of movements in wholesale energy prices email info@amberenergy.net or call 0844 357 2859.