Why Energy Prices Spike and How to Protect Your Business

It’s frustrating when you open your quarterly energy bill only to find the cost has gone up for no reason.

Energy price shifts can mean your gas and electricity costs change unpredictably, potentially leaving your business out of pocket.

In this guide we’ll explain why energy prices go up, the reasons why the amount you pay changes, and how to safeguard your business from these fluctuations.

What Causes Energy Prices to Increase?

Imagine the energy market like a graph.This graph has two lines: the ‘supply curve’ and the ‘demand curve.’

The supply curve shows the amount of energy that producers, like power plants and renewable energy sources, are willing to supply at different price levels.

The demand curve shows how much energy that consumers, like homes and businesses, are willing to buy at different price levels.

The ‘intersection point’ is where the supply and demand curves meet. This is the market price, where the amount of energy supplied matches the amount of energy demanded, and the price you see on your bill.

What Influences the Supply and Demand Curve?

The supply and demand curves fluctuate overtime, which affects the market price. 

Some of the reasons these curves shift include:

●     Demand elasticity. This measures how sensitive the demand for energy is to changes in price. For example, a factory needs a lot of energy no matter the price, so it has an inelastic demand. An office can ask staff to work from home to reduce energy costs, so it has an elastic demand

●     Supply constraints. Geopolitical events, natural disasters, and regulatory changes can limit the amount of energy available. For example, the conflict inUkraine resulted in higher energy prices worldwide as it led to disruptions in the supply of Russian natural gas

●     Seasonal and economic factors. Energy demand often increases in winter or during economic booms when industrial activity is high

While some of these factors are unexpected, others are predictable, and you can mitigate against them.

How to Protect Your Business Against Energy Spikes

Energy spikes can be annoying for all companies. The good news is that there are things you can do to lessen the impact.

Here are some ways you can protect your business from price surges.

1. Invest in energy management systems. Smart grids, IoT-enabled systems, and energy monitoring tools can track and control your energy usage, as well as identify inefficiencies
2. Develop a long-term energy procurement strategy. Thinking ahead can protect you from energy spikes months, years, even decades in the future. For example, you can source energy from multiple     providers and include various energy types to avoid over-reliance on a single source
3. Consider energy–efficient initiatives. LED lighting, high-efficiency HVAC systems, and improved insulation can lead to substantial savings
4. Stay up to date with regulatory requirements. Regulatory changes can affect the cost of energy. For example, the Climate Change Levy, a tax on energy use for businesses in certain industries. Keeping informed of upcoming changes means you can stay one step ahead and plan for the future 
5. Work with an energy consultancy. An energy consultancy like Tritility can help you navigate the ups and downs of the energy market and ensure you pay the right price for your gas and electricity. We’ll identify the right contract type based on your needs, meaning you save money and time

Additional Ideas for Larger Businesses

Businesses of all shapes and sizes can use the strategies above, but here are two extra ways large and enterprise businesses can safeguard themselves.

1. Use financial hedging tools. These tools reduce your exposure to fluctuations, making your energy bills more predictable. A dynamic hedging strategy adapts to market conditions and forecasted energy usage, adding an extra layer of security
2. Look at on-site renewable energy. Renewable energy like solar panels and wind turbines reduces dependence on external energy sources and helps you become more sustainable

Looking to reduce energy bills across the board? Check out our guide to cutting your energy costs.

Need Help Understanding the Energy Market?

The energy market can be complex, but working with an energy consultancy can make things much more simple.

Get in touch with us today, and we’ll do the hard work for you, meaning you can focus on what you do best – running your business.