Archive for June, 2013

According to a new Credit Suisse report UK electricity prices could be nearly double those of Germany by 2016 due to new carbon taxes.

The bank found that wholesale electricity prices could be 85% higher than those in Germany by 2016-17 due to a fivefold increase in the new tax on carbon dioxide emitting generation over the next seven years, exacerbated by the lack of interconnection capacity which makes it harder for the UK to benefit from lower mainland European prices. There is a currently a 25% difference in UK-German power prices.

The mandatory £4.94 per tonne CO2 tax, introduced earlier this year, is in addition to the EU Emissions Trading System (EU ETS) carbon charges. The combined cost will increase to £30 per tonne in 2020, driving an increase in electricity prices.

Meanwhile, German prices have fallen due to the boom in wind and solar power, although Germany is now reducing subsidies which may slow the growth in renewable generation.

The UK plan is to cap the value of renewable subsidies annually with the intention that a high carbon tax will incentivise investment in renewables. There are concerns however, that these caps will limit increased renewable capacity, leaving businesses and consumers paying high carbon taxes without the benefit of a significant rise in renewable generation.

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A recent report by Oxford Economics for the British Retail Consortium found that, despite cutting energy use by 20% since 2008, retailers’ electricity, gas and water costs have increased by 17% since 2010.

The survey reported that while business costs had increased by 20% since 2006 sales increased by just 12% over the same period, resulting in store closures and job losses. While some market sensitive costs such as rents responded to the economic downturn, utility costs had increased sharply.

Measures retailers should look at to curb their energy costs include:

  • monitoring consumption: benchmarking consumption across multiple stores provides the intelligence needed to improve energy efficiency and help staff cut consumption
  • eliminating waste: ensure that heating, air conditioning and lighting controls are set correctly; small changes can make big long-term savings
  • lighting: store lighting is often the largest energy cost for many non-food retailers, so investing in LED lighting can generate a quick payback while also reducing carbon emissions
  • procuring smartly: taking a long-term view to your energy contracts rather than just waiting for each renewal means you can avoid wholesale energy price spikes and reduce the admin workload with co-terminating contracts
Flexible procurement ca
n generate long-term savings

A large organisation with regional manufacturing and national retail operations had traditional taken out one year fixed energy contracts, leaving them exposed to fluctuations in the wholesale energy market and at risk of sharp price increases at renewal.

In 2008 their current contract ended at the height of the Lehman Brothers financial turmoil, which saw electricity prices shoot up to around £90 p/MWH from less than £60.

After an initial consultation Energy & Carbon Management (E&CM) recommended a 3-month contract, as they believed that the market had peaked and would soon fall back to more reasonable levels. The client agreed, and subsequently took out a series of short contracts which tracked the market down to nearer £40 p/MWH.

As the full impact of the financial crisis made itself felt energy prices continued to fall, at which point a 2-year fixed contract was agreed, delivering considerable savings compared to renewing at £90 p/MWH as they would have done in the past.

This more flexible approach was a departure for the client, requiring in-depth understanding of market trends and drivers, the ability to act quickly in a changing market and trust in the E&CM advice.

Transmission & distribution costs are pushing up the price of electricity

Third party charges and non-commodity costs are set to increase significantly as government charges (including Ofgem’s regulatory price controls RIIO, the Renewable Obligation Certificate (ROC) and Feed-in Tariffs) kick-in. According to one report, wholesale electricity costs would need to fall by 20% in the next two years to maintain costs at their current level.

In 2007 these third party charges, along with infrastructure costs, accounted for around 25% of total electricity costs; that proportion is now nearer 40%.

Electricity costs breakdown

The unit price of energy used by supply companies is made up of three elements:

  1. energy cost: varies hour-by-hour, day-by-day depending on the wholesale energy market; single largest component of the unit price
  2. infrastructure costs: includes losses as energy is transmitted and distributed from power stations (Transmission Loss and Distribution Loss), along with the cost of the transmission and distribution networks, referred to as the Transmission Use of System (TUOS) and Distribution Use of System (DUOS). These charges vary depending on your geographic location. The National Grid also charges suppliers a fee for (around 1% of your bill) for balancing system charges, ensuring supply meets demand across the network.
  3. cost to serve: supplier costs (IT systems, wages etc); typically around 2% of bills.

These costs generally account for 70-80% of your total bill. The remainder is taken up with pass through charges:

  1. standing charges: installation and maintenance of the electricity network, and distributor’s administration costs; calculated at either a fixed monthly or daily rate
  2. available charge (capacity charge): network investment and maintenance costs, fee per unit based on the agreed capacity of the site
  3. reactive power charge: difference between the electricity supplied and the electricity converted into useful power; if a large amount of power is being wasted, more current is required to provide the same output, which incurs a higher charge
  4. half hourly data charge: costs of collecting and handling your meter data
  5. settlement agency fee: distribution, supply, metering and other companies need to reimburse and recover costs from one another, using a system called Elexon, which adds a small fee
  6. renewables obligation: support scheme to encourage renewable generation, adding about 2% to most bills

These pass through charges should be checked regularly to ensure you’re only paying for what you use: reviewing available capacity and reactive power charges and meter operating agreements can result in savings, particularly if your facilities have seen a change of use, major refurbishment or installation of new equipment or machinery.

May 2013 electricuity & gas pricesEnergy & Carbon Management’s review of May’s energy markets shows both electricity and gas prices remained broadly stable after falling in April: gas prices were down 0.74% and electricity by 0.48%.

With above average temperatures forecast to continue the current market prices offer good value, both for immediate short-term renewals and on 2-year contracts.

The annual wholesale review shows the wholesale electricity price fell in the last 12 months by 2.92%, although gas is up by a substantial 6.84%. The increase is mainly due to price falls this time last year on fears of the Euro-zone economy (electricity did not experience as sharp a fall as gas).

The cost of energy is rarely out of the headlines at the moment, with families and businesses under pressure from volatile energy markets, increasing infrastructure costs and taxes – and prospects remain bleak according to the UK’s largest businesses. A recent survey of Major Energy Users Council (MEUC) members found that

  • 51% believe gas prices will increase by between 25-50% in the next 5 years; a further 17% felt they would increase by over 50%
  • 47% stated that electricity prices would rise by between 25-50%, while 41% felt the increase would be over 50%

The failure to resolve the energy trilemma – security of supply, affordability and sustainability – continues to challenge policymakers and suppliers, with serious financial implications for many businesses. Managing these implications through a long-term, proactive energy strategy is therefore vital, even for those who usually pay little attention to their energy costs.

There are several straightforward measures all business can take to reduce the risk of escalating energy prices while cutting consumption and costs, summarised in the 5-step energy check below. Several require minimal investment or time and may even unearth refunds from historic overcharging and supplier mistakes, so are well worth looking into.

  1. Reduce the risk of rising prices: monitor the wholesale energy markets and only contract when prices are in your favour, which is often not at renewal time. Procure intelligently through forward or flexible contracts.
  2. Validate your invoices: check every component of your invoice – mistakes happen! Audit your historic invoices as you could be due refunds.
  3. Optimise your tariffs: are the correct energy tariffs being applied? If not, you could make savings – and gain refunds.
  4. Make the most of your meters: access to the consumption data available from smart meters can allow cross comparison of individual sites energy usage patterns to identify and eliminate energy wastage and reduce costs
  5. Change behaviours: profiling your energy consumption provides the intelligence needed to change the way you use energy, in many cases leading to savings of up to 20% through no- or low-cost measures