Predicting Commercial Gas Prices

23rd June 2009 By admin

There is no doubt that business electricity and business gas are essential to many businesses. They are also one business expense which is dictated largely by market prices (within a global framework). There are a huge amount of factors both related directly to usage and to very much exogenous factors like politics and force majeure events which impact pricing.

That prices are largely unpredictable given they are in a constant state of flux is a given. Having said that businesses still have a number of things they can control to mitigate the effects of a change of energy pricing on their business.

For businesses where energy is a major input cost, they have the option to use futures markets to buy in future supply or indeed to hedge themselves on future prices. These users tend to be fairly sophisticated so they are often guided by specialist brokers.

For other businesses the key factors on pricing are i) obtaining the best pricing the market ii) determining if they are happy to have the certainty of fixed pricing (and over what period) versus the uncertainty of floating prices.

i) Obtaining the best pricing – There are a number of routes to do this. The most common is to use a broker, in the belief that this will get you access to all the best pricing. Unfortunately, unlike in financial markets where there is an obligation on a broker to work in the best interests of a client – this is not always the case with business energy brokers. While ostensibly independent, they may not have relationships with all potential energy suppliers. Furthermore, the energy suppliers themselves are likely to provide different pricing to certain favoured partners. The other issue with brokers is transparency – in other words who is paying them. Brokers will frequently give lip service to finding you the best price regardless of whether they earn anything out of it – clearly this is unsustainable. They earn money from commission from energy companies or fees from you (or perhaps a bit of both). So while the case for business brokers, is clear – that they will trawl the market the method of b2b price comparison is simply not the same as b2c price comparison. Therefore, while it’s worth getting a quote from a broker it may also be worth getting some quotes direct yourself. That way you can satisfy yourself you really are getting the best deal and there is an opportunity to play off one supplier against the other to get the best deal.

ii) Fixing and Contract duration – If the only certainty in pricing is uncertainty – then as a business you have a clear choice. Sacrifice the possibility of cheaper prices for the certainty of fixed prices – or sacrifice the possibility of fixed pricing against the risk of higher prices and the possibility of lower prices. This is the key factor for businesses to appreciate is the risk. As a decision maker you need to weigh up the consequences of risk to your business against the opportunity for better margins in the event of lower prices (and possibility becoming non-competitive where energy is a big input cost). It’s also not always a binary choice, i.e. you can fix part of your supply and leave part of it floating. This is definitely an area where if your energy costs are big it’s worth seeking professional advice. By way of example in another industry in the last few years, some airlines have been able to improve their margins because they successfully hedged out some of the oil risk, while some have suffered. Similarly as the oil price fell some companies were locked into higher prices and some companies were not. The key takeaway is that there are different risk:reward ratios for different businesses. You should always model different scenarios, especially worse case scenarios to better help you understand the range of outcomes.

Here at businessgas.co.uk we’ve noticed the volatility in pricing and we think it’s good for customers looking forcommercial gas prices to search around the market to help find the best pricing and term structure for their needs.

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