Since October 2003, UK Industry has experienced unprecedented rises in the cost of energy, with some devastating impacts on businesses. The chemical industry has seen gas price increases averaging 70% in the last 2 years, with the retail sector seeing increases of between 40 to 50% for gas and electricity over the same period.

Newspaper headlines are a daily reminder of the problems with stories of closures due to rising utility costs becoming almost common place.

Sir Digby Jones (Director General of the CBI) - said recently, “The spiralling costs of energy are increasingly eating into companies’ ability to compete, and with prices this high some heavily energy-dependent firms could be forced to shut down or shut down production”.

The business community now face unpredictable market forces that are generally outside of their control, with companies across the UK finding it increasingly difficult to secure competitive supply contracts going forward, with many being faced with hard choices of mitigating the soaring charges by reducing production, laying off workers, or even moving production overseas.

Due to rapidly depleting UK gas reserves coupled with the current shortage of UK gas import and storage facilities (a situation which despite major investment now being underway will not improve significantly over the short term), it seems certain that gas and hence electricity prices will continue to rise.

If urgent action is not taken to reduce the burden of the increases, there will be serious and irreversible consequences for the UK economy.

At an individual company level, businesses need to ensure they procure their energy as competitively as possible, and take appropriate action to increase energy efficiency to help negate the inevitable increases.

A word of caution. There seems to be a marked trend by suppliers to promote variable type supply contracts in recent months. Whilst these contracts are appropriate for some, they do not offer the ability to accurately set budgets.

Keep in mind that variable contracts, irrespective of which indexing mechanism is used, passes 100% of the risk of market volatility from the supplier to the customer. There was a marked shift to similar POOL type contracts for electricity in the mid 90’s, where the promise of large potential savings were mooted by suppliers, and which resulted in many customers being left facing huge reconciliation payments when the price of energy subsequently rose.