UK industry set to fork out billions due to soaring energy costs in 2022
The UK manufacturing industry is set to swallow a bill of £22.4bn due to soaring wholesale energy costs this year as a result of surging oil and gas prices.
Ongoing volatile power prices will increase factories’ wholesale energy costs by an extra £8.7bn in 2022, impacting their already squeezed margins.
Squeaky, the leading marketplace for 100% clean energy, used data from the Digest of United Kingdom Energy Statistics (DUKES) to calculate the impact of the rise in wholesale energy costs on UK industry, if the increase in these costs filters through into the direct costs of these businesses the result could be catastrophic.
To date, British manufacturers have been largely unexposed to oil and gas price spikes as many adopt a rolling hedging program buying energy supplies 12-to-24 months in advance. However, energy inventories allocated to later this year will have been negotiated at wholesale prices that could be as much as five times higher than they were in 2020.
Year-on-year increase in wholesale energy costs
Based on the forward curve for the rest of 2022, the power price is currently (08/02/22) trading at £193, which is a 451% increase in electricity costs from 2020.
|Cost of electricity||2019||2020||2021||2022|
|Price (£MWh) (08/02/22)||£43.00||£35.00||£118.00||£193.00|
Based on the forward curve for the rest of 2022, the gas price is currently (08/02/22) trading at 195 pence per therm, which is a 647% increase in gas costs from 2020.
|Cost of gas||2019||2020||2021||2022|
|Pence Per Therm (08/02/22)||34.91||26.11||119.12||195|
Impact of the rise in energy costs on UK industry
As a result of the increase in wholesale energy costs, Squeaky has calculated that in 2022, UK industry will need to fork out £22.4bn in wholesale energy (gas and electricity combined) costs in order to operate. This amounts to £8.7bn more than 2021, and £18.7bn more than in 2020. Note this excludes the additional costs paid to national grid and the network companies and policy costs to support renewables and the grid.
Chris Bowden, founder and CEO of Squeaky, said: “Whereas consumers are being hit by soaring energy prices right now, the price pain for businesses has been delayed by the way most businesses hedge forward on a rolling basis. There is no doubt that businesses will be hit hard when the costs do arrive. The energy crisis is a ticking time bomb for businesses. If you are a corporation, your power price depends on when you have hedged it – in other words, covered your position. A £10 million increase in energy costs for a company, with, for example, a price-earnings ratio of 20, means that a £10m increase will knock £200m off that company’s market cap. It is yet to be seen, but some companies may find themselves in a big hole.”
Bowden continues: “Businesses can mitigate risk by protecting themselves against price volatility. A Corporate Power Purchase Agreement (CPPA), a long-term contract between an energy buyer and an energy generator, enables businesses to lock-in a long-term supply of clean energy and importantly the prices for new to earth projects are significantly below the wholesale market price as solar and wind costs aren’t linked to fossil fuels. Energy prices are so uncertain right now, but a CPPA is a tangible way for companies to gain some certainty, whilst also demonstrating their environmental commitment too.”