Reacting and reforecasting: How suppliers have responded to COVID-19
4th June 2020
The rapid spread of Covid-19 has led to an unprecedented degree of change to the ways we live and work. As countries have introduced measures to prevent the spread of Covid-19, the major impact has seen all of us adopt changes to our day-to-day lives.
Government guidance has seen businesses faced with unique and pressing challenges, and the closure of non-essential businesses and the shift to remote working has fundamentally changed energy consumption.
While we are beginning to take the first steps out of lockdown and back towards a semblance of everyday normality, energy consumption may take longer to return to its previous patterns - or may be changed for good.
How Covid-19 has affected energy demand
Energy consumption patterns have changed significantly over the course of the UK’s lockdown - so much so that the system operator, National Grid, has raised concerns around system stability.
As the country has gone into lockdown to combat Covid-19, businesses closures - and the widespread shift to working from home - has caused energy demand to change dramatically in a short period of time.
Weekday consumption now looks more similar to a typical Saturday or Sunday; energy consumption overall is down by around 20%. Whilst this rapid change has brought some positive results in the form of reduced carbon intensity, it has also raised some interesting challenges.
Forecasting energy consumption
When taking on a customer for energy supply, all suppliers undertake a forecast to determine how much energy that customer will consume. This figure is based on a combination of historic energy consumption as well as a customer’s best estimate of what they may consume on site.
When it comes to determining the price of the energy a customer needs, forecasting is central. For customers with a fixed contract, the power required is priced at the time the contract is offered. For flexible customers, the price is dependent on when the customer decides to enter the market to buy (or sell) and the power is priced retrospectively.
It’s important that energy suppliers routinely forecast as accurately as possible, so that energy demand data provided to the system operator matches expected supply, ensuring system stability.
While forecasted energy consumption is written into a supply contract, it can be changed by either party if it becomes apparent that actual consumption will vary from the contracted volume. This requires either party to reforecast, giving a more accurate picture of the expected energy consumption.
It’s important - and a matter of regulatory concern - that customers genuinely represent their energy consumption in these forecasts, as knowingly under- or over-purchasing energy on the wholesale market in bad faith can constitute speculative trading.
When entering a contract for flexible energy supply, energy is purchased on behalf of the customer by the supplier based on predicted demand. This demand is forecasted in good faith, and customers are expected to represent their demand accurately; if that demand does not materialise, the cost burden does not lie with the supplier.
The difference between volume variance and reforecasting
Suppliers frequently build volume variance or volume tolerance mechanisms into contracts to protect the supplier against variances in consumption outside of the volume that has been contractually agreed.
Volume variance clauses are a cost recovery mechanism for suppliers to protect against forecast deviation, and also provide a degree of protection for customers using energy outside of their arranged consumption. However, they do not provide protection against large variances in consumption and will not protect customers against increased costs due to reforecasting. However, it essential to undertake reforecasting for the reasons illustrated above.
As such, volume tolerance mechanisms give high-volume energy consumers a degree of flexibility in their energy contracts and can help to protect consumers and suppliers from short-term market volatility. This also offers safeguards - both for suppliers and customers - against speculative trading on the wholesale market.
How suppliers have responded to Covid-19
Businesses are currently using much less energy, and for those businesses with flexible supply contracts there will be implications around their contracted volumes.
As such - and in line with most, if not all, energy suppliers across the country - Haven Power has been contacting the relevant customers across our portfolio and reforecasting their energy use.
Subsequently, we currently require our customers on flexible supply contracts to adjust their contractual volumes and sell back any unused power or purchase additional power. Because of Covid-19’s impact on the wholesale energy market, customers doing so will likely see an impact to their final energy costs.
How we’re helping throughout Covid-19
At Haven Power, our commercial and energy trading teams routinely undertake reforecasting work for our customers, helping them to re-calculate their energy use and the cost implications. We’ve also been working closely with relevant partners, where appropriate, to help them through these processes during this period of uncertainty.
We understand that the last few months have presented a unique and challenging set of circumstances. If you’re a Haven Power customer and you’re worried that your energy consumption needs reforecasting as a result of the Covid-19 pandemic, please contact us.
While reforecasting may potentially lead to a higher cost for your energy, we are considering each customers’ circumstances on a case-by-case basis and may be able to offer tailored advice to help you through this period.
As well as helping our customers to adjust during a time of tumultuous change, our parent company, Drax, has announced a wider support package for our customers, communities and employees.Contact us about reforecasting now