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Power Price Uncertainty

Last updated on 11/05/2016

So electricity prices are not going up. Power NI announced they wouldn’t be changing their tariff for households. And that decision was quickly followed by SSE Airtricity which said it too would be holding its charges.

You’ll note that Power NI didn’t say it was freezing its prices. That was no accident. The company is only guaranteeing to keep things the way they were until the New Year. Now, normally prices are fixed for a 12 months. They can be raised or lowered mid year if wholesale costs have shifted so far to justify a change. But this is something different.

Power NI are unable to provide the usual visibility on charges because they are entering the winter without the level of insurance they would normally have acquired to protect themselves and more importantly their customers against a dramatic change in wholesale prices. In the past they would have secured this insurance through hedges but the market for hedges currently is much more challenging. 

This situation is not their choice. The problem for Power NI is that there is not the same volume and right type of hedging products on the market. And that is because the market has changed.

The main sources of hedging products have been largely ESB and to a lesser extent Viridian’s Power Procurement Business. Both these companies for different reasons traded a sizeable volume of generation within the all island Single Electricity Market which allowed them to sell Contracts for Differences - the hedging product electricity suppliers want to buy. Again for different reasons ESB and more critically PPB are not in a position to offer suppliers including Power NI not just  the volume but the sort of Contracts for Difference they need. In the past Power NI could insulate itself and its customers with year long contracts. Now contracts are almost entirely for a quarter or just a month.

So what does this mean for consumers? It means tariffs may potentially bounce around a bit. Of itself volatility in charges is not necessarily a bad thing. Hedging may protect you from price rises but it also prevents you from benefitting from price drops. But generally households and businesses don’t like fluctuating costs. But I suspect they might have to get used to it.

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