Energy prices and the Construction industry
By Rebeccah Dowell, January 27th 2022
Following an unprecedented year of uncertainty due to COVID-19, the construction industry experienced another setback in material shortages during Q4 of 2021 due to a surge in energy prices.
The Energy Crisis
There have been several factors recorded over the past few months that have contributed to this rise including:
- European and British gas storage levels – daily production has not been enough to meet demand.
- Colder temperatures in April and May last year, EU storage sites are around 20% lower than normal – a colder start to the year reduced European gas reserves.
- Low wind generation across Europe – creating a demand from gas-burning electricity generating power stations.
(Wholesale energy prices explained: Why our rates are changing, 2021)
Construction products such as steel, aluminum, glass, brick and ceramics, require high energy as part of the manufacturing process. This high energy demand coverts to around 25% of the manufacturing cost of the construction material. The surge in energy prices has resulted in higher prices of goods and manufacturing delays due to price increases for the manufacturer.
For example, Scunthorpe based British Steel, has started to add surcharges of up to £30 per ton to their products, reflecting the rise in costs (Davies, 2022). The higher energy prices will effectively impact suppliers working on fixed price contracts as they cannot recover the increased costs of energy prices or construction products.
It is therefore important for contractors to consider any potential delays and price hikes that may occur during current and upcoming projects and understand what work will carry most risk.
Arcadis have recently upgraded their overall tender price forecast for 2021 reflecting a 4-5% increase on buildings, a 5-6% increase in infrastructure and indicated that this will be carried over into 2022 (Arcadis, 2021).
Although this setback has already seen the collapse of numerous energy suppliers in late 2021, the construction industry has not yet slowed down and during Q3 of 2021 the output saw prices reach £46.2bn. It is also important to note that infrastructure work is currently 20% higher than the long-term average and the demand for these facilities remains strong.
Market intelligence leader Anieszka Kryzaniak said: “There are a number of short-term measures that clients can take now to reduce their exposure to risk. For example, cutting the idle and stand-by time of equipment will save on fuel, and has the added benefit of reducing carbon emissions. In the longer term, switching to electric equipment, planning for the adoption of hydrogen, and educating plant operatives in managing emissions, will not only result in energy cost savings, but pave the way for more positive societal impacts too.”
The impact of COVID-19
As discussed in our previous Covid-19 update article, the construction industry has already faced a number of difficulties including HGV and labour shortages due to COVID-19 and Brexit, whereby the UK saw around 43,000 construction job vacancies between July and September 2021.
As a result of these factors and the continuous pressure on the construction industry, many businesses have been driven into insolvency and around 9 in 10 local builders forced to delay work (Woodfield, 2021).
Supply shortages were present during the final quarter in 2021 and the industry should not be expected to see any improvements until the first quarter of 2022.
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Arcadis.com. 2021. UK Autumn Market View: December 2021. [online] Available at: <https://www.arcadis.com/en-gb/knowledge-hub/perspectives/europe/united-kingdom/2021/uk-autumn-market-view-december-2021>
Shellenergy.co.uk. 2022. Wholesale energy prices explained: Why our rates are changing. [online] Available at: <https://www.shellenergy.co.uk/blog/post/wholesale-energy-prices-explained-why-our-rates-are-changing>
Woodfield, J., 2022. Will the Construction Materials Shortage Continue in 2022?. [online] Homebuilding & Renovating. Available at: <https://www.homebuilding.co.uk/news/construction-materials-shortage>
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