Archive for the ‘Energy prices’ 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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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

To no great surprise Ofgem announced that it had abandoned attempts to introduce a code of conduct for energy brokers/consultants, despite several years, numerous consultations and innumerable workshops.

The code was intended to be a set of standards that set a benchmark for high quality consultants acting as intermediaries between non-domestic energy users and suppliers, protecting businesses from unprofessional and misleading tactics. Initial plans from Ofgem indicating that suppliers would only be able to work with consultants who had signed up to the code of practice have now been scrapped.

Ofgem reported that they found inconclusive evidence of consultant malpractice, so has postponed further work on the code and instead said that consultants should take on voluntary principles to treat businesses fairly.

Things to be aware of when working with a consultant…

  • some consultants may represent a single or small group of suppliers rather than the whole market
  • you’re not obliged to accept an offer from a consultant: ensure you understand their services, fees and T&Cs before accepting
  • make sure you’re comparing like-for-like: supplier and consultant price offers may not be presented in the same way, some charges may be pass-though and therefore vary during the contract lifetime, while others are fixed

Questions for your consultant…

  • how many suppliers will be approached for prices?
  • what will you do to help switch supplier?
  • what other services are included during the life of the contract?
  • how do you charge for your services – a direct fee or an indirect commission?

Although Ofgem doesn’t licence consultants, they must comply with consumer protection legislation such as the Business Protection from Misleading Marketing Regulations (BPMMRs) – and since November 2013 Ofgem has the power to apply to the courts for an injunction to prevent breaches of the BPMMRs.

UK energy markets spiked in the immediate aftermath of the Brexit vote, mainly due to the weakness of the pound making fossil fuel imports more expensive. They’ve since fallen back a little though remain up from their Jan-April 2016 lows.

In the next few years a number of issues will impact the price paid on your next energy contracts:

  • Informal discussions between Opec and non-Opec countries may result in some kind of agreement to cut back oil production (many leading producers, including Saudi Arabia and Russia, are suffering from the current low price), which would increase the oil price from its current US$45-50 level, and could in turn would push up gas and electricity prices
  • Exchange rate: if the pound continues to strengthen against the dollar and Euro those increases may be negated, but with the exact nature of Brexit still to be confirmed there remains a significant level of currency uncertainty and risk
  • In the longer-term the market sees wholesale electricity costs falling on the back of reduced demand (due to efficiency improvements) and a greater contribution from renewables
  • However, this possible easing will likely be countered by increases in non-energy chargestransmission, distribution and government charges/taxes (including those subsidising renewables)

Despite recent market fluctuations it remains a good time to be looking at longer term contracts, taking advantage of the relative market lows while minimising the risk from price spikes.

The implementation of Ofgem regulation P272 from April 2017 means that around 155,000 electricity supply points will move to half-hourly billing from next April (if not before).

The new ruling affects supply points with Meter Point Administration Number (MPAN) profile classes beginning 05, 06, 07 or 08 (the first 2 digits of the 22-digit supply identification MPAN). Those beginning with 00, 01, 02, 03 and 04 will see no change.

While the intention is to offer these businesses cheaper off-peak electricity and therefore incentivise them to cut consumption at peak periods, it could lead to higher costs for those which have little choice on when they use power (eg schools).

In the short-term those renewing supply contracts for 05-08 supplies should prepare for and understand the changes…

  1. Suppliers are taking different approaches to the change, with some transferring supplies to half-hourly rates within 45 days of a new contract starting, while others are waiting until nearer April 2017. As P272 means new charges apply to your supply it’s important to understand the approach being taken by your supplier.
  2. Supplies renewing in the next few months should receive a non-half hourly (as before) offer, along with a half-hourly price, which means you should be able to compare the change in overall cost.
  3. The principle new cost you’ll see is a capacity charge, which is the maximum electricity you can draw from the grid at any one moment, determined by the local Distribution Network Operator (DNO). The capacity level should reflect your actual demand so needs to be monitored to ensure you’re not paying for something you’re not using.
  4. Half-Hourly supplies also incur Meter Operating (MOP) and Data Collector/Aggregator (DC/DC) charges: the MOP covers the installation and maintenance of the meter, while the DC/DA pays for the collection of meter data and passing it to the supplier. These charges can vary widely, particularly if you’re put onto default contracts, so do shop around for the best options.

Do get in touch to find out more about how P272 could impact your organisation.

The Competition and Markets Authority (CMA) recently proposed a number of measures designed to increase competition and reduce energy costs for small businesses, including…

  • ending automatic rollover contracts
  • enabling rival suppliers and energy brokers to access customer details so they can target them with cheaper energy offers
  • moving all small businesses to half-hourly settlements
  • requiring suppliers to publish all tariffs on their website to increase transparency

According to the CMA suppliers make twice the margin on small business customers than they do in the domestic market, and four times the margin compared to larger industrial customers.

It also found that small firms were paying around one-third more on rollover contracts for electricity and about 25% more for gas. Those on out-of-contract or deemed rates are paying at least two-thirds more for both electricity and gas than those on contracted rates.

Half-hourly settlement would improve invoicing accuracy and mean businesses could pay less by using energy outside peak times, although those who have no choice but to use power in the expensive morning and evening peak periods may end up paying more.

It’s not clear if or when the CMA’s proposals will be implemented, but it’s likely that half-hourly settlements will be introduced at some point by Ofgem (already underway for some customers), while pressure on suppliers to improve customer service, transparency and pricing from the CMA, Ofgem and others is set to continue.

 

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.