Archive for the ‘Energy market’ Category

It’s election time which means it must also be time for politician’s to pledge capping residential energy prices… but this time it’s the Conservatives.

Re-wind a few years and it was Ed Miliband promising that Labour would freeze energy prices for 20 months if they won the 2015 election, which generated headlines, hot air and hysteria, while also putting the Conservatives on the back foot.

This time it’s the Conservative party who are reportedly going to cap household energy prices in an effort to reduce the average bill by around £100 a year.

As with the Labour initiative, this raises at least as many questions as it attempts to answer

  • if standard tariffs (never the best option) are capped, what is to stop suppliers raising the cost of their cheaper rates, in the process penalising those consumers who do shop around for the best deal?
  • will the price freeze cover all elements of energy costs?
  • if so, does that means transmission and distribution infrastructure investment will be capped/reduced to prevent prices rises?
  • if energy companies freeze investment in new generation capacity what are the implications for the UK’s ability to keep the lights on?

Five of the Big Six (EDF, Eon, npower, SSE and Scottish Power) have increased prices this year, with only BG holding them (for the time being).

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Ofgem has revealed plans to protect consumers in the event their energy supplier goes bust – a new MOU sets out how Ofgem, the Treasury and Department for Business, Energy & Industrial Strategy (BEIS) will work to ensure continuity of supply.

Suppliers would enter into an Energy Supply Company Administration to provide uninterrupted supply and continued safe operation of essential services.

The measure would be used if Ofgem failed to appoint a Supplier of Last Resort, which is used when a smaller supplier goes under – as when Co-operative Energy took over 160,000 of GB Energy’s customers after it went bust last November.

The Special Administrator has an obligation to consider consumers as well as creditor interests.

New analysis from Ofgem shows that energy supplier costs are up by 15% since January 2016, primarily due to an increase in the wholesale gas and electricity markets, driven by a rising oil price and the weakness of the pound post-Brexit.

Despite this increase the Ofgem supplier cost index shows that costs remain below those at the start of 2014, with a sharp rise during the second half of 2016 following two years of falling costs.

While energy costs, particularly electricity, are on the up with further uncertainty likely, it remains a good time to be reviewing all contracts due for renewal in 2017 (if not beyond).

The easiest way to do this is to run an indicative tender to understand your exposure to rising markets and the impact of further increases, and if it makes sense lock-in future contracts now to protect you from further market fluctuations.

 

 

The US Energy Information Administration (EIA) forecast in December that the 2017 oil price would average US$52, similar to current levels though double that of a year ago.

However, Forbes analysis recently found that past EIA forecasts varied from actual prices by 30-35%, and with other expert forecasts also not faring too well, predicting the future price of oil, gas and electricity is a pretty thankless task.

The variety and complexity of factors influencing energy prices mean it is increasingly difficult to provide confident price predictions, from the geo-politics of the Middle East, Opec and Russia to Brexit and Trump, the expansion of renewable energy and supply- and demand-side technological developments such as fracking, battery storage and energy efficiency.

While oil and gas prices may experience see relatively stable 2017, UK electricity prices are all but certain to see an increase:

  • The wholesale electricity element now accounts for less than 50% of your bill, so even if the commodity markets fall prices could still increase on the back of rising non-energy charges
  • These non-energy costs – transportation, distribution, government charges, taxes etc – will increase over the next few years, resulting in higher costs for all

What to do?

  • Understand your risk: what is the impact on your business if prices increase by 5, 10, 15% a year over the next few years?
  • Manage that risk: test the market early, don’t wait until near your renewal time when you could be hit by a price spike – contract when the market is in your favour
  • Focus on efficiency: cut costs and reduce exposure to volatile markets by using less

Even before the Brexit vote on 23 June the energy markets had experienced a couple of months of steady increases after a lengthy period of stability. Between April and the referendum wholesale market rises equated to increases of approximately 25% in the cost of gas and 18% in the cost of electricity.

The immediate aftermath of the leave vote saw suppliers pull prices in the midst of currency falls and general surprise and uncertainty. This short-term volatility could well continue, although in the longer-term underlying factors such as the price of oil, new generation capacity, policy changes and investor confidence are likely to be the main drivers.

Energy prices

The fall in the value of the pound will inevitably result in more expensive imports (on which the UK is increasingly reliant).

How long this will last is very difficult to predict, though fears over the UK and European economies could also lead to a weakening of oil prices, stalling their recent rises and negating some of these exchange rate costs.

Energy investment

Of concern is also the impact Brexit will have on the much needed investment in the UK’s energy infrastructure – around £19 billion a year is required until 2020, much of which is expected to come from foreign sources to fund new nuclear, offshore wind and gas power stations.

Until there’s clarity on new trade agreements this investment would well be put on hold, threatening security of supply and carbon reduction targets, which in turn could push up prices.

In particular, the future of the Hinkley nuclear power plant in development by EDF with Chinese backing remains uncertain: will the French Government facing their own economic and political challenges really back a massive and possibly risky investment in a non-EU British project?

In the absence of a new Prime Minister and clarity on a timetable for Brexit – let alone what that actually means – energy prices are likely to continue their recent upward trend, based on an unhealthy mix of uncertainty and volatility.

 

 

A leave vote in the UK’s looming EU referendum could lead to two years of energy policy – and therefore price – uncertainty according to a new report by the UK Energy Research Centre.

The UKERC report states that if Brexit results in the UK having an isolated energy system rather than one integrated with that of the European system prices would likely rise, while reduced influence on Europe’s energy markets could also have an impact.

Another report, this time by the Chatham House think tank, also highlighted the positives of remaining within the EU, including benefiting from an integrated energy market, influencing its direction and reducing the policy and investment uncertainty that would come with an exit.

Not surprisingly, the leave campaign maintains that leaving the EU would provide the freedom to keep bills down, meet climate change targets and keep the lights on by no longer needing to comply with EU directives.

However, with the UK increasingly reliant on imported energy from and through the EU, energy prices will still be influenced by factors outside the control of the UK government, while the UK may also have to comply with EU market, environmental and governance rules to benefit from continued inter-connectedness, rules over which it would have no influence after an exit.

 

 

 

The decision by Chancellor George Osborne to abolish the Carbon Reduction Commitment (CRC) from 2019 received a positive reaction from many of the large businesses who had to comply with the often bureaucratic scheme.

What wasn’t highlighted so clearly was that the £900 million raised by the CRC from businesses required to purchase carbon credits will result in an increase in the Climate Change Levy (CCL) from 2019 to leave the change fiscally neutral.

What this means is that many small and medium businesses will see their CCL costs rise to cover this the scrapping of the CRC. In its current form the CCL raises around £800 million a year, so it’s likely that CCL rates will double by 2019 – good news for those businesses no longer required to comply with the CRC, but not so good for everyone else.

With non-commodity charges, including the CCL, now accounting for over 50% of total electricity costs the recent falls in wholesale energy markets have largely been negated, so if/when the markets start to increase businesses will feel a double-impact.

By April 2019 some forecasts put non-commodity costs alone at over £90 p/MWH, up from around £60 p/MWH now and a current wholesale energy price of around £37 p/MWH. If wholesale prices move back towards the £50 p/MWH mark as anticipated, the overall cost of electricity will hit around £140 p/MWH before the end of the decade.

As ever, the only way to protect your organisation from rising energy and non-energy costs is to use less, so there’s never been a better time to identify wastage and efficiency opportunities.

 

After a lengthy period of declining energy markets the last couple of weeks have seen wholesale electricity prices spike to around £40 p/MWH compared to January lows of £33.

A mix of Sterling falling against the US dollar and Euro on the back of Brexit uncertainties has pushed up the cost of energy imports, rising oil prices (nearing $48 p/barrel against lows of $27), along with the recent cold snap increasing demand, have created a volatility not seen for some time.

In the longer-term the expectation is that the market will remain suppressed, but the current volatility highlights the importance of monitoring the market well in advance of renewing your energy contracts – buying at the wrong time could turn out to be an expensive mistake.

It’s therefore important not to wait until you receive your supplier renewal letter: prices fluctuate, so implementing a long-term strategy ensures you’re buying when the wholesale energy market is in your favour, not just when your contract terminates.

 

 

 

The collapse in the price of oil attracted numerous headlines in the new year, falling to less than US$30 a barrel. Since then however, the market has pushed up by about 19% to nearly US$33, though from such a low base this only equates to a US$5 a barrel increase.

In comparison, oil was trading at around US$60 a barrel this time last year, and over US$100 a barrel 18 months ago.

The post-January oil increase is now being reflected in gas and electricity markets, though again they’re still trading below their recent longer-term trends.

It’s too early to tell whether the price bounce is the beginning of a period of upward price momentum, but it could signal the beginning of a period of relative volatility so needs to be monitored.

The good news is that it remains an excellent time to look at any renewals for 2016.

The Government’s ‘reset’ of energy policy this week spelt good news for the builders of gas-fired and nuclear power stations, along with shale gas producers, but not such good news for renewable generation or coal, with all coal-fired power stations closed by 2025.

The already-announced reduction in subsidies for photo-voltaic and onshore wind power were accompanied by a warning to the offshore wind industry to lower costs or also see the end of subsidies. The French and Chinese operators of the planned new nuclear plants, on the other hand, will benefit from a guaranteed £92.50 p/MWH when they come on stream, more than double the current wholesale market price (£39 p/MWH).

Although the importance of energy efficiency was highlighted, there were disappointingly no new measures to support businesses and consumers in implementing efficiency measures, which is surely easier than building more stations.