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Pricing Volatility

Price volatility in the gas and electricity market

Domestic energy captures all the headlines quite understandable and is the focus of the political commentary, but the reality is that the energy markets are more vulnerable to business.

The government and regulators have been slow to respond to this reality, but they are starting to wake up to the realities of what the energy market is facing. Whether it's through the Number 10 cross-industry working group or the Retail Market Review by Ofgem, action is coming, though late.

If we look at the entire energy market, we can divide it into three general parts:

Residential

This considers the power suppliers well-known uniform movement in prices once, perhaps twice a year.

SME

More exposed than the housing market; yet somewhat isolated by tariff sheet pricing' from wholesale market movements.

Corporate

Because of their size and quantity of energy use, corporate clients experience the biggest exposure to movements in the wholesale sector.

Residential Market

Although the size of these price changes cannot be handled slightly, and a good deal of scrutiny and attention is received quite understandably, they are dwarfed by the regularity of price motion on the energy company market.

The SME Market

This is where a company energy provider will buy energy in advance and thus ensure a fixed price for a set amount of clients for a fixed period of time. Once the cost distribution has passed, however, it is gone and the company that arrives too late for the offer will be subjected to a fresh price that is possibly greater than the present market rate.

However, there's a complication. Unlike the housing offer, the tariff sheet price is subject to a broad spectrum of requirements each combination can deliver a distinct price result.

Suppliers each have different business strategies, different generation access, and pricing methodology depending on area, profile, type of meter, usage, type of company, credit rating and form of payment. So the combinations are quickly starting to stack up. As inevitably does the average SME customer's confusion.

Besides these business factors, there is to contend with the live wholesale market. A market that erodes the supplier's margin steadily and sometimes not so steadily as the variable cost of raw energy increases.

As this volatility occurs, suppliers will withdraw their re-pricing tariff sheets before releasing the revised prices to the market once the energy needed to support these prices is secured.

The SME market sees about 30 price changes per month, or 360 per year, on average, compared to 1 or occasionally 2 per year on the residential market. However, this is dwarfed every day by the 48-half-hour price periods that drive the wholesale industry itself.

The Corporate Market

It is the final market segment, the corporate clients, that faces the biggest exposure to these movements in the wholesale market.

Suppliers do not want to be subjected to any variation in customer behavior because of the sheer size of these clients and therefore the importance of the amounts of energy they use. Such variability can lead to brief supply matching with demand, forcing them to buy energy in the expensive and sometimes expensive short-term market.

Because of this, corporate clients have a tailor-made pricing industry where the price they pay is directly linked to the wholesale business stage. The electricity wholesale market is priced on a half-hour basis. In other words, for any specified agreement, a new price is published for energy in every half hour. As a result, because the underlying prices change every half an hour, the price offered to a corporate customer will theoretically change until the customer has been locked into a specific price for a specific period.

Because a cost in a single half-hour can also vary depending on when that energy is supplied with the range of prospective rates that a client will see In effect, a corporate customer's retail price is subject to the same volatility as the underlying wholesale industry.

This is even before the supplier's business factors are taken into consideration, such as the duration of the agreement to be offered, when to buy the energy, how much energy to buy and at what cost it can be accessed.

In fact, you can see a cost and the chance to open your company in the morning for these companies is gone.

Comparing the markets

While the corporate sector considers market volatility at its peak, the market for small and medium-sized enterprises is subject to much the same volatility, although smoothed depending on the capacity of a supplier to navigate the market through tariff sheets.

The national market appears serene in contrast.

Despite, or rather because of, this volatility, one of the corporate energy market's main characteristics is the possibilities that are constantly generated to access an advantageous agreement.

The providers move their prices mainly together in the housing industry and on a comparable trajectory, so once you switched and savings banked, there is a restricted chance for important future savings.

By comparison, because the wholesale market is moving up and down, and because the electricity market is priced 48 times a day, a customer's amount of prices can differ considerably.

This offers powerful possibilities to reach an advantageous agreement even in what appears to be a linear upward route from a distance as a market.

Then some good may come out of chaos.

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