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Energy Price Forecast 2020

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This item is part of the Predictions & Trends - Special Issue - 01/2020, click here for more

Predicting the future price of anything is a tricky business and with energy the same is true. A whole range of factors come into play such as geopolitics, environmental disasters, available supply, and consumer demand. Nonetheless, here is our energy price forecast for 2020.

Why do energy prices rise?

Several factors impact the price of gas and electricity. Market forces can cause the wholesale price of gas to rise, which results in energy customers being charged with a larger bill. 

Gas prices are impacted by supply as it is pumped out of the ground and its usage is dependent on infrastructure such as pipelines. An issue with the pumping process or pipelines can negatively impact the amount of gas available.

Electricity prices, on the other hand, are often impacted due to the continued reliance on fossil fuels such as oil and coal. These are all-natural resources that are expensive to mine or pump and most importantly are in finite supply. 

Any disruption to these supplies will harm price rises. 

The Impact of the Ofgem Price Cap

In the latter stages of 2019, most energy suppliers implemented price drops with the average consumer seeing a £75 reduction in their energy bills. The fall in prices then was a reaction to the reduction of the energy price cap set by Ofgem. Data suggests that 15 million UK households benefited from the cuts. 

Despite those price cuts, we can expect to see an adverse reaction if the price cap is increased in 2020. The price cap is reviewed twice a year, with changes coming into effect in April and October. It is set to remain until 2020, after which Ofgem will recommend on an annual basis if it should continue, up to 2023.

The price cap will be reviewed again in February 2020 and if it is increased again, energy suppliers will likely raise their prices in April. Any increase to a supplier’s costs could also be passed down to customers and see them hit with higher energy bills.

Geopolitics and global conflicts

Gas and oil supplies are more prone to the effects of geopolitics and conflicts than other resources due. Oil is pumped in war-torn nations or in areas where tensions are high. The attack on Saudi Arabia’s oil facilities in September, for example, disrupted supplies and raised prices. 

The 17-minute raid by 18 drones and three low-flying missiles caused a spike in oil prices, fires and damage and shut down more than 5% of the world’s oil supply. 

In 2020 oil prices are likely to come under renewed pressure following the release of a report from the United States that shows new evidence that the attack likely came from the north, reinforcing its earlier assessment that Iran was behind the offensive. If a major conflict does break out with Iran, we can expect oil prices to increase sharply due to the inevitable disruption to Middle Eastern supplies such a war would create.

A report released in December also raised the possibility of a renewed danger posed by ISIS. The terror group may have seen its caliphate destroyed but according to intelligence reports, the Jihadis have regrouped and are gaining strength as they take advantage of the internal turmoil in Iraq. 

“They have better techniques, better tactics and a lot more money at their disposal. They can buy vehicles, weapons, food supplies and equipment. Technologically they are savvier. It is more difficult to flush them out. So, they are like al-Qaeda on steroids,” said a top Kurdish counter-terrorism official.

From Turkey earning the ire of Mediterranean nations over its plans over a gas pipeline, to Russia’s conflict with Ukraine and strained relations with the EU, volatility and potential flashpoints exist when it comes to the commodity.

Brexit

With the deadlock in parliament finally broken following the Conservatives resounding victory in the general election, Brexit is a go. On January 31st, the UK will leave the EU and negotiations will begin on establishing a new trade deal with the bloc. 

Depending on how those talks go the UK could either retain our membership in the Internal Energy Market (IEM) or leave it. Remaining in the IEM would mean that the UK would have to stick to EU policies and rules, something that is now doubtful after Boris Johnson’s withdrawal deal no longer includes the part that says the UK will align with EU rules. 

A departure from the IEM could lead to higher gas prices and less energy security unless a new agreement is reached. 

The government’s pledge to reach net-zero carbon emissions by 2050 will also be put into effect which is likely to put more pressure on energy distributors and suppliers to pick up the pace on decarbonisation.

Ofgem interventions and new rules for suppliers

In the UK, one of the biggest impacts on pricing is likely to be any market interventions made by Ofgem. In December, Breeze energy was the latest energy supplier to exit the market resulting in 18,000 of its customers being handed to British gas, Ofgem’s chosen Supplier of Last Resort. 

With Breeze being the ninth supplier to go under in 2019, Ofgem is looking at creating new rules to make entering the energy supplier market more difficult with tougher criteria needed to attain a license.

Under plans proposed in October, Energy suppliers could be forced to undergo independent audits of their finances under new rules aimed at reducing the number of smaller energy suppliers going bust. Smaller companies already operating could also be prevented from taking on new customers under the clampdown.

Thanks to the wealth of competition provided by smaller suppliers in recent years they have been forced to lower prices to compete. However, a reduction in the number of competitors to the biggest energy suppliers could lead to price rises for consumers.

Ofgem is expected to implement the stricter criteria for market entry in the summer of 2020.

Improving Technology

The technology being used in the energy sector has improved markedly in recent years. 

The financial cost of digital transformation can be high initially, but once the systems and processes are established, savings can be made in the long run. New computer systems and CRM tools, for example, have streamlined costs for energy suppliers. 

Permission driven access determines user functionality and system structures are easily configured to the desired processes of individual UK gas and electricity suppliers.

Advancements in renewable energy technology will also see cheaper energy costs. With wind and solar becoming more efficient and contributing more to the UK’s energy mix, suppliers will see cheaper wholesale prices which they can then pass onto their customers if they wish.

Improved technology could result in lower energy prices for the customers of those suppliers who have already made the transformative leap.

Accurately predicting what will happen in 2020 is an impossible task due to so many variables. From Brexit and potential flashpoints in the Middle East to new regulations imposed by Ofgem and the performance of energy suppliers one thing is certain, it is certainly going to be an interesting year. 

Matthew Olney's picture

Thank Matthew for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Jan 24, 2020 5:17 pm GMT

A great overview of how complex energy prices can be, as any aspect of geopolitical, regulatory, market, or technological could come and undo all predictions. Given that, kudos to making a forecast despite all the noise and uncertainty!

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