Fix, Flex or Wait? What High Energy Prices Mean for Business Buyers
With near-term wholesale prices remaining extremely high, should businesses secure certainty now, retain flexibility or look further down the market curve for better value?
Energy buyers currently face an uncomfortable decision
Wholesale gas for the coming winter is trading close to 200 pence per therm, while power is around £159 per megawatt hour. Although day-ahead markets may occasionally trade below these levels, there is currently no meaningful short-term relief for businesses.
Waiting for prices to fall carries risk. However, fixing an entire energy requirement at today’s winter prices may feel equally difficult.
Doing nothing is still a decision, and it leaves budgets exposed to whatever happens next. Rather than trying to predict the market’s next move, businesses should consider how much certainty they require, how long they need it for and where the market is currently offering relative value.
Why contract length matters
The shape of the wholesale market is particularly important at present. The next year carries a significant premium, but prices further ahead are considerably lower. By summer 2028, wholesale gas is around 83 pence per therm, while power is approximately £71 per megawatt hour. Further along the curve, summer power prices are generally sitting in the mid-to-high £60s.
These prices are not necessarily low by historic standards, and the forward curve should not be treated as a prediction of where the market will eventually settle. However, the difference between the coming winter and later periods is substantial.
A longer-term contract could allow a business to blend an expensive opening period with lower-priced years further ahead. This may improve budget certainty and reduce the need to renegotiate the organisation’s entire energy position every year.
This does not mean that every business should fix every unit of energy for five years. The right agreement must reflect expected consumption, operational plans and the flexibility required if sites, occupancy levels or production volumes change.
Some organisations may prefer a fully fixed arrangement. Others may benefit from a longer flexible contract that allows energy to be purchased in stages. Contract length and purchasing strategy are separate decisions. Both need to be considered as part of the organisation’s wider risk-management approach.
Wholesale prices are only part of the final cost
The figures above relate to wholesale energy rather than the final price shown on a supplier quotation.
A business’s delivered energy cost will also reflect:
Its consumption profile and when energy is used
Network and policy charges
Supplier costs and margin
Metering arrangements
Contract structure and purchasing strategy
Nevertheless, the wholesale market is sending a clear signal: businesses are being charged heavily for near-term risk, while comparatively better value is available further down the curve.
Why are near-term prices so high?
The market is not necessarily pricing an immediate UK supply shortage. Instead, it is accounting for the possibility of disruption to gas infrastructure, reduced LNG availability, low renewable generation and limitations on European power imports.
Further ahead, the market assumes that global supply will expand and some of today’s exceptional risks will begin to ease. This contrast between immediate risk and longer-term optimism is particularly visible in the gas market.
Gas market update
Two LNG cargoes are currently due to arrive in the UK, one from the United States and another from Algeria. Temperatures are also expected to remain above seasonal norms, which should keep heating demand relatively low.
These factors may help limit further increases, but they do not make current prices comfortable or typical.
Infrastructure and geopolitical risks remain significant. Reports of a Ukrainian strike on a Russian Arctic gas facility have added to the risk premium already affecting near-term prices.
Diplomatic developments may also influence the market. Progress in discussions involving the United States, Iran and Qatar could reduce concerns surrounding Middle Eastern gas flows. Meanwhile, speculation that China could revive a major agreement to purchase American LNG may create greater competition for cargoes that could otherwise reach Europe.
QatarEnergy has also indicated that disruption around the Strait of Hormuz could delay LNG expansion projects expected during 2027 and 2028. These projects support some of the market’s expectations of lower future prices. If additional LNG supply arrives later than anticipated, the journey towards those lower prices may be less straightforward.
Proposed expansion of Norwegian Arctic gas is unlikely to materially affect regional supply until the mid-2040s, meaning it cannot address the challenge facing buyers over the next few contract years.
Power market update
The relationship between gas and power remains important.
When wind generation or electricity imports are low, the UK often relies more heavily on gas-fired generation. If gas is expensive, the cost of producing the final unit of electricity needed to balance the system also increases.
Wind generation is forecast to average around one-third below normal this week, with output expected to fall particularly low during some periods. This increases the need for gas-fired generation at a time when gas prices are already elevated.
European power markets are also influencing the UK position.
Recent industrial action in France reduced generation by approximately 6.5GW at its peak. Although most of that capacity returned the following morning, renewed action could limit the electricity available for export to the UK through interconnectors.
Hydroelectric generation across Europe is also running around one-fifth below normal following very low river levels. With limited recovery expected before October, the system has fewer lower-cost alternatives and may need to rely more heavily on gas.
The longer-term outlook is more encouraging. Construction has begun on a Belgian battery project capable of storing 2.8GWh of electricity, with completion planned for 2028. As more storage is developed across connected European markets, renewable electricity can be stored when it is plentiful and released when the system is tight, helping to reduce some of the expensive peaks caused by low wind and high gas use.
What should businesses do next?
The immediate market remains expensive and sensitive to geopolitical developments, infrastructure disruption, weather conditions and renewable output. Comfortable supply on an individual day does not remove those wider risks.
At the same time, the later curve presents an opportunity for businesses to look beyond their next renewal.
A longer contract may help an organisation:
Blend current high prices with lower-priced future periods
Improve long-term budget certainty
Reduce exposure to short renewal deadlines
Purchase energy in stages where an appropriate flexible structure is available
Align its energy strategy with future operational and consumption plans
There is no single answer that will suit every business. The right decision will depend on consumption certainty, budget requirements, operational plans and risk appetite. However, with such a significant difference between near-term and longer-term prices, contract length should now be a central part of the procurement conversation, not an afterthought.
Speak to Smarta Energy
Smarta Energy supports complex organisations in understanding their energy position, comparing procurement options and developing strategies that reflect their individual requirements.
If you would like us to compare different contract lengths, explain the trade-offs between fixed and flexible purchasing, or model what the current market curve could mean for your budget, contact the Smarta Energy team below.
Disclaimer
This market update is provided for general information only and reflects market conditions at the time of recording/publication. It should not be treated as financial, legal or procurement advice, or as a recommendation to buy, sell, fix or trade energy at any particular time. Energy markets can change quickly, and businesses should seek advice based on their own circumstances before making procurement decisions.
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