Blog Post

Energy Price Forecast 2020 – The Impact of Coronavirus

Matt Olney • Apr 21, 2020

At the start of the year we published our Energy Price Forecast 2020, but due to the huge impact of the Covid 19 pandemic, things have changed wildly since then. Here’s our updated Energy Price Forecast 2020.

Impact of the Covid 19 Pandemic

The Covid-19 pandemic has had more of an impact on the world than anything since World War Two.

The global economy is forecast to be plunged into a deep recession at best and an outright global depression at worst. Consequently, energy prices have taken a wallop.

The lockdown in the UK has resulted in many of the big suppliers taking large financial hits whilst new, smaller suppliers take advantage by offering tariffs that in some cases undercut their larger and less flexible rivals.

Whereas the big suppliers have taken hits to ensure that their far larger customer base is supported throughout the lockdown, smaller suppliers aren’t as heavily impacted.

There has also been much debate in the sector over a government bailout. Some suppliers are crying out for one, others believe that the energy sector is currently not in need of one and is much better prepared for the impacts of the pandemic than others.

They argue that suppliers are still earning money from their customers, whereas other sectors such as the hospitality sector has been effectively shuttered.

The Price Cap

In February 2020 and prior to the implementation of the UK lockdown, Ofgem announced a lowering of the energy price cap by £17.

With wholesale energy prices continuing to fall many experts criticised the price cap, saying that the regulator had not gone far enough to pass on savings to consumers.

Cheaper wholesale energy prices are now benefiting households, with the cheapest energy tariff in the UK falling by £32.60.

The combination of the pressures introduced by the Coronavirus pandemic and already falling wholesale energy prices has already eaten into the revenues of many energy suppliers.

Again, it seems that the largest suppliers will take the hit as their smaller competitors undercut their prices.

*In April 2021 the price will rise following an increase in wholesale energy prices and easing to lockdown measures.

Also read: Ofgem Hikes Energy Price Cap raising Energy Bills to pre-pandemic levels

Collapsing Oil Prices

The global oversupply of oil has resulted in the largest price crash in history.

The Coronavirus pandemic and ongoing disputes between Saudi Arabia and Russia overproduction have resulted in a global collapse in demand for the commodity.

US crude oil has taken the biggest hit as it fell to below zero as stockpiles overwhelmed storage facilities.

Prices went into free-fall from $18 a barrel to -$38 in the space of a few hours on April 20th forcing oil producers to pay buyers to take barrels off their hands.

Gas prices have continued to be under pressure on the downside due to falling demand as both the weather warms and as businesses remain closed due to the pandemic.

The price of both oil and gas is likely to continue heading down until the end of the lockdown and the global economy begins to come back to life.

With no definitive date as to when the lockdowns will end its unlikely prices will rise until the summer.

*Oil prices rallied following the easing of the first lockdown in July 2020. Since then prices have risen back to pre pandemic levels. Further increases could occur due to instability in gas and oil producing nations. A terrorist attack in Mozambique in March 2021 has put into jeopardy one of the world's largest natural gas facilities.

The Big Suppliers are unlikely to pass on wholesale price cuts

‘Day ahead’ contracts for gas delivery were already falling back in January, but due to the pandemic, these have fallen even further.

Prices have recently fallen to 10-year lows of below 17p per therm. As wholesale costs make up 40% of an energy bill, we would expect energy bills to fall too.

With all the economic uncertainty created by the pandemic, many people are seeking ways to save money. Saving how much they spend on energy usage often tops the list.

Smaller suppliers are already passing on these savings to their customers with one cutting its prices by as much as 30%, resulting in its consumers paying an average of £320 less per year for a dual fuel tariff.

Unlike their smaller competitors, the larger suppliers are having a tougher time of things. As Joe Malinowski of switching service TheEnergyShop.com said:

“Companies in the current lockdown environment have to ensure they look after vulnerable customers. For customers with pre-payment meters, they are sending out keys with credit top-ups worth £50, and the reality is that they will probably have to write off those sums.

“They are also not allowed to cut off customers with standard meters, so they will probably be thumped with a massive bill for bad debts further down the line. The big companies have actually behaved remarkably well during this period, and in these circumstances, I wouldn’t expect them to be doing much to cut standard bills as well.”

Ofgem interventions and new rules for suppliers

In March Ofgem announced that it was reviewing its work plans for 2020 in light of the COVID-19 pandemic.

In a statement the regulator said: ‘Ofgem will “be pragmatic in our approach to compliance during this period”, encouraging companies to take action based on what was right for the customers given the situation. This will be considered in any decisions made about a company’s compliance going forwards they were reassured.’

Ofgem was expected to implement the stricter criteria for market entry in the summer of 2020, it remains to be seen whether the pandemic could delay this introduction or not.

Dyball can assist in navigating these new rules.

Geopolitics and global conflicts

With the world focused on the pandemic the tensions and conflicts of earlier in the year have taken something of a backseat. However, new geopolitical tensions could arise because of the virus.

China will likely feel the ire of the world with many blaming the Chinese Communist Party of covering up the virus and allowing it to spread across the world.

The global community could impose penalties on the nation or demand compensation. How business is done will also likely change with western nations determined not to rely so heavily on China for manufacturing and cheap goods.

Less developed nations will be hit hard by the virus, already unrest has been reported in some countries.

Depending on how their governments respond we could witness regime changes to outright civil unrest in some regions.

One thing is certain. A return to the geopolitical status-quo after the trauma of COVID-19 is slim.

Update 09/11/2020 - The Covid-19 pandemic continues to impact the world. The UK has imposed a second lockdown that the government hopes will be lifted by December 2nd. Some commentators, however, are predicting the lockdown could last until March 2021. Read more - What will Lockdown 2.0 mean for UK Energy Suppliers?