Reading Between the Lines

Back in April of this year, with wholesale prices at historic lows, the media, consumer groups, and industry parties were all calling for “Big 6” suppliers to pass on the “double digit savings” to their customers. With winter looming and prices on the rise again, the Big 6 are back in the spotlight, but this time things are in reverse…

Big Six energy giants ‘don’t need to raise prices this winter’ – The Telegraph, 17th November 2016

Energy Secretary Greg Clark slams Big Six energy companies for treating Brits ‘unfairly’ as firms make SEVEN times more than they claim – The Sun, 16th November 2016

Back in April of this year, when prices were low, we wrote an article exploring why there is often a gap between wholesale prices and supplier’s tariffs. First and foremost, it’s hedging strategy that causes the lag in a falling market. In simple terms, this means that the energy delivered today has often been bought months or even years in the past, when prices may have been different.

This price lag was the main reason offered up by suppliers at the time as their explanation for not lowering their prices. But now that prices are on the rise, their own argument is being used against them.

So what’s going on?

In our article earlier this year, we pointed out that whilst commodity cost and hedging strategy do indeed play a role in the cost of energy, there’s a whole range of other issues suppliers need to tackle – operational, technological and financial – in order to stay competitive, and the combination of these factors can erode any potential wholesale benefit they might be able to realise.

Reading between the lines this time around, the principles remain the same. The price of energy and when it was bought are only a small piece of a much larger picture.

Due to the complex nature of the UK energy industry and its settlements process, suppliers can lose approximately 2-4% of their turnover due to the reconciliation processes and the gap between the industry’s view of costs and what the supplier has billed its customers. Managing these processes can carry a significant FTE burden and associated cost when not optimised.

Similarly, another 2-3% can be lost due to volatility of its customer’s demand (particularly prominent during winter), and an unpredictability in its customer base (driven by the proportion of customers on variable tariffs that can move away at any time). These risks can be managed through intelligent modelling and trading forecasts, but a strong data capability is required to enable this level of insight.

The takeaway from all of this is that the energy industry is complex, and any one issue is unlikely to have one simple answer.

At ENSEK, we’ve set out to address this complexity head on to help suppliers big and small serve their customers as effectively and efficiently as possible. To find out how we could help your business, get in touch today to find out more.