In the intricate dance of energy markets, understanding the rhythm is crucial, especially for businesses. Many business clients hold the belief that the residential price cap drop scheduled for April 2024 will affect their energy contracts—a misconception that could lead to missed opportunities. Let’s clarify why the residential price cap is a different tune to the one businesses dance to.
The Residential Energy Market: A Buffered Beat
Residential energy prices are influenced by the price cap, which is Ofgem's way of keeping the beat steady for households across the UK. The cap is based on a six-month average of wholesale prices and is adjusted accordingly, but only twice a year. This creates a lag effect, where the impact of market changes is delayed in reaching consumers.
Understanding Business Energy Contracts in the Current Market
Businesses, however, operate to a different beat—one that moves in real-time with the live market prices. Business energy contracts are directly influenced by the current wholesale costs, not a price cap. This means that as the market prices change, so too can the cost of energy for businesses—whether that's an increase or a saving.
The graph below shows the direction of the wholesale energy market over the last 12 months. With the recent downward trend in energy prices, businesses can capitalise on the lower prices and secure their next contracts at a cheaper rate, up to 12 months before their current contracts is due to expire.
Misconception in the Market
It's a common misconception among business clients that they should wait for the residential price cap to drop before renewing or signing new contracts. This strategy overlooks the fact that business energy prices are not dictated by the price cap and are, instead, subject to the immediate fluctuations of the live market.
A Closer Look at Recent Trends
The wholesale market prices over the last 12 months have shown significant volatility, which directly affects business contracts. For instance, we've seen:
A decrease in gas prices from 106 pence per therm to 69 pence per therm.
Electricity prices experiencing similar drops, from 142 £/MWh to 69.25 £/MWh.
These shifts are crucial for businesses to consider when deciding on the timing of their energy contract renewals.
The Cost of Waiting
For businesses, waiting for the April 2024 residential price cap drop could be a costly mistake. If the market starts to increase again, they may face higher prices despite a residential drop. The recent decrease in market prices suggests that now may be an opportune time for businesses to secure energy contracts, rather than waiting for a residential cap change that doesn't apply to them.
Conclusion: Staying in Tune with the Market
Understanding the nuances between residential and business energy markets is essential. Businesses need to stay in sync with the live market to make informed decisions about their energy contracts. To keep an eye on the energy market, we invite you to follow our Weekly Energy Market Report which you can subscribe to, to actively follow the market movements and capitalise on securing your next energy contracts at the best time!
Don't Miss the Beat
Are you a business owner unsure about the best time to secure your energy contract? Let Smart Energy Co guide you through the market’s fluctuations and help you lock in rates that suit your business’s rhythm.
0151 459 3388 | info@smart-energy.uk
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