What is Energy Forecasting?

An energy price forecast is a projection of what the future price of gas and electricity will be over a certain period. These forecasts consider various factors that influence energy prices, including supply and demand, weather patterns, geopolitical events, technological advancements, and regulatory changes.

There are different types of forecasts that can be made in the energy market. These include short-term, medium-term, and longterm forecasts. Short-term forecasts cover a few weeks or months, while medium-term forecasts cover several months to a year, and long-term forecasts cover multiple years.

Energy price forecasts are important for energy market stakeholders such as energy producers, traders, and consumers. These forecasts help them make informed decisions about buying, selling, or using energy. Policymakers such as the government or Ofgem also use these forecasts to inform their decisions about energy policies and regulations.

Energy Prices in 2030

Prices are unlikely to drop below pre-2022 levels until the late 2030s. The increased reliance and switching to electrical heating will continue to put a strain on the grid.

In the short-term, prices are likely to drop due to the introduction of cost-effective and lowcarbon energy sources such as solar and on/offshore wind power. This could make prices drop below £100/MWh by 2028, sooner than previously expected.

When approaching 2030, the transition towards more affordable renewable energy and more electrification of the economy – in order to maintain a reliable power supply, infrastructure and maintain strong system stability.

Are these changes guarenteed?

The future of energy prices over the next two decades is dependent on several factors, including changes in weather patterns to conflicts between countries that disrupt the trade of energy worldwide.

Many more factors can influence the price of energy over time or cause short-term spikes that we will discuss later. Therefore, energy price forecasts should be treated as rough estimates rather than exact predictions. Additionally, the plans set forth by governments worldwide to achieve Net Zero and other sustainability goals could also impact the trajectory of energy prices. In the UK, the current objective is to achieve Net Zero carbon by 2050. However, various factors, largely financial, could affect the implementation of these plans.

How Does Energy Price Forecasting Work?

Energy price forecasts are like weather predictions, but for energy costs. They help individuals and companies estimate how much they may have to pay for energy in the future.

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Forecasting: Step-by-Step

1. Looking at Patterns: Analysts look for patterns in energy prices by assessing past prices and times prices rose or fell, this helps identify trends.
2. Checking the Weather: Just as a hot summer can mean more air conditioning and higher energy use, weather forecasts play a big role. If it’s going to be very cold or very hot, that can change how much energy people use and thus the price.
3. Understanding Supply and Demand: Analysts compare how much energy is available with the amount needed. High demand and low availability will increase prices.
4. Watching the World: World events such as new pollution laws, companies changing energy usage, or countries based on the above factors. While thisis the most complex form, it is the most detailed and accurate.
5. Using Math and Models: With all this information, analysts use special computer programs that can handle lots of data. These programs use math to predict future prices based on all the factors they’ve considered. This is the most complicated form of price forecasting but is usually the most detailed and accurate.

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The summer of 2021 marks the start of the energy crisis, with the lockdowns ending and businesses reopening, there was a huge spike in energy usage in many places all over the world, especially Asia and Europe. This instantly put a strain on the energy supply, meaning wholesale prices had to rise.

The increases at this time were not forecasted in any medium to long-term forecasts, as nobody could predict the COVID-19 pandemic, however, once the pandemic hit, there was an expectation for prices to rise once businesses started to operate once again.

Short-Term Forecasts

Short-term forecasts typically consider immediate factors, such as current weather conditions, unexpected changes in demand or supply, and short-termmarket trends. In the energy sector, this can involve anticipating price fluctuations due to a sudden rise in demand for heating during a cold spell or a briefclosure of a power plant. Short-term forecasts are valuable for making swift decisions, such as adjusting production levels or setting prices for the near future

Medium-Term Forecasts

Medium-term forecasts can take into account technology trends such as the adoption of renewable energy, regulatory changes, and economic trends that may impact supply and demand. For example, forecasting any potential increase in electricity demand due to the growth of electric vehicles.

These forecasts help plan investments and make strategic decisions, such as determining where a company should construct new power plants or how it should adapt to anticipated market changes.

Long-Term Forecasts

Long-term forecasts delve into broad trends, such as demographic changes, long-term economic forecasts, environmental policies, and major shifts in technology or energy sources. For instance, predicting how the shift towards a carbonneutral economy might affect energy.  These are used for policy making, longterm strategic planning, and investment decisions that have a long horizon before they pay off. They’re more about understanding the direction of big changes than about specific price points.

How Forecasts Change

Medium- and Long-term forecasting can consider lots of factors and can result in very accurate predictions. However, there are events which they cannot take into account, such as the invasion of Ukraine by Russia which we will discuss soon. These events are rare, which is why it is extremely unlikely they can be accounted for when forecasting energy prices. Geopolitical events often have extreme and immediate effects on the energy industry, causing fluctuations in prices and shifts in energy policies worldwide. These events can range from conflicts and wars to sanctions, trade agreements, and political instability in key regions.The reasons for these changes include disruptions in supply, alterations in trade routes, changes in demand due to economic sanctions, and shifts in investor sentiment.

Surge in Oil and Gas Prices: Fears of supply disruptions caused by the conflict and subsequent sanctions on Russia by Western countries led to sharp increases in oil and natural gas prices globally.

‍Search for Alternative Suppliers: European countries, heavily reliant on Russian gas, accelerated their search for alternative sources, including liquefied natural gas (LNG) from the US and other regions, and increased investments in renewable energy sources.

‍Energy Security Concerns: The conflict highlighted the vulnerabilities associated with heavy reliance on a single supplier for energy needs, prompting many countries to re-evaluate their energy policies and seek to diversify their energy sources.

‍Inflationary Pressures: The rise in energy prices contributed to inflationary pressures worldwide, affecting economies already grappling with the economic fallout from the COVID-19 pandemic.

Conclusion

For businesses, energy price forecasts are essential, especially when energy constitutes a large portion of operating costs. Forecasts can help businesses budget for the future, adapt their future strategies and decision-making, and assist in their sustainability goals.

For businesses, energy price forecasts are essential, especially when energy constitutes a large portion of operating costs. Forecasts can help businesses budget for the future, adapt their future strategies and decision-making, and assist in their sustainability goals.

So, any business, no matter the size or industry can benefit massively from understanding forecasts, and the future trends of energy prices which are guaranteed to affect them, as we have seen in recent years.