Why have gas prices increased?
• Prolonged cold winter during 2020-2021 – This drained natural gas stores
• Low solar and wind output, due to poor summer and less windy weather
• Gradual phasing out of coal plants
• Fire damaging a key power line linking the UK to France
• Less gas from Russia – exports are one fifth of pre-pandemic levels
How does this impact the food sector?
The immediate impact of the rising energy costs is that these will be passed on to consumers. With energy being a major component of cost for manufacturers, rising prices will directly impact profit margins for food producers, increasing their cost base in direct relation to their level of output.
A direct consequence of the rising energy costs is the closure of two key fertiliser plants run by CF Industries, who produce 60% of the UK’s food grade CO2, due to them being unable to cope with rising energy tariffs imposed on them. It has taken an intervention by the UK Government and tens of millions of pounds to get one of the plants up and running again to meet demand, but this will still mean inflated Co2 prices, putting further pressure on many food and drink producers and their profit margins. And this intervention is only a short term, 3 week solution..
How can businesses mitigate the impact of energy prices increases?
Be honest with your customers – as stated above, increased energy costs will have a large impact on the cost of production, and so it may be worth having a frank conversation with your customers on how this is impacting your profitability.
Be steadfast with your energy contracts – the advice from Ofgem is that if your supplier fails, they will ensure that gas and electricity supplies will continue uninterrupted. You will be switched to a “supplier of last resort”, with your credit transferred. Your contract will change to a deemed contract, which will, in the short term, likely cost you more as the new supplier takes on added risk.
Shop around once the dust settles – If you are allocated a new supplier, once they get in touch, enquire about their cheapest tariff and request to be put onto it. Simultaneously, you should be shopping around for a new supplier – you want to be certain you are receiving the best price and there will be no exit fees if you wish to change.
CO2; Try buying forward – If you know your production schedule for Christmas, and you have sufficient working capital coverage, can you buy your required CO2 inputs now, rather than later? There is no guarantee that you will have purchased at the best price, but it may be a better alternative to not being able to fulfil your orders over Christmas.
Pick the low-hanging fruit – This may seem obvious, but the more energy efficient your processing unit can be, the less your energy costs will be. Although it may be too late for the current crisis, look into energy-saving processes and options such as motion-sensor lights, LED lights, effective insulation for refrigeration and heating. In the long run, it may be sensible to consider investing in more sustainable energy sources such as solar panels to reduce your reliance on the national grid.