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.

Advertisements

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.

Hinckley: to B or not to B?

Posted: August 24, 2016 in Uncategorized

The seemingly never-ending saga of the Hinckley B nuclear power station seems no closer to resolution… after 3 years edging closer to a signed contract the EDF board finally gave approval in July, only for the UK Government to decide more time was needed to review the deal.

While the pretext may have been to ensure the small print was all OK, the real reasons are more obscure. Many focused on Prime Minister Teresa May’s apparent concern about handing over the financing and development of a key national infrastructure asset to China, while the 35 year strike price of £92.50 p/MWH is increasingly thought to be over generous at a time of wholesale prices in the £40-45 range.

The ongoing lull in wholesale energy prices makes Hinckley look on the (very) pricey side, which means advocates of mandatory LED installation and other energy efficiency measures, along with offshore wind and solar generation are gaining traction as quicker and cheaper means of meeting the UK’s long-term energy needs.

With the UK’s energy policy in a state of flux (along with much else after the Brexit vote) the decision on Hinckley will set the UK’s energy policy direction for the next few decades.

 

 

Organisations that exceed their assigned available capacity on half-hourly electricity supplies will be penalised under new measures being introduced by Ofgem from 1 April 2018.

These distribution costs make up between 25-30% of overall electricity costs so it’s important that they’re at the correct level.

At the moment if you exceed the available capacity suppliers only charge the standard kVa available capacity charge, which is often minimal so gives no incentive to reduce consumption or increase the capacity.

From April 2018 the excess charge could be over three times the standard rate. The exact penalty will vary by region and voltage – in areas with high capacity demand (such as London) the costs could be higher.

The good news is that there’s plenty of time to review your available capacity levels to ensure they’re aligned to your needs through analysis of historic capacity demand and understanding of likely future demand:

  • if a site exceeds the set capacity level then either take measures to reduce demand to avoid penalties, or apply for increased capacity (which can take several months to agree)
  • if capacity demand is constantly well below your set available capacity (and no demand growth is expected) savings could be made by reducing your capacity level
  • if you’ve moved to a new site be sure to check the capacity levels as they will have been agreed with the previous occupier who may have used significantly more/less power than you

Not sure if your capacity charges match your organisation needs? Contact me for help.

What is Available Capacity?

The Available Supply Capacity is the maximum electricity you can draw from the grid at any one moment. The local Distribution Network Operator (DNO) is required to make this capacity available, so if you use significantly more than your agreed kVa it’s important that an application for increased kVa is submitted. Available capacity is measured in Kilo Volt Amperes (kVa) and charged on a monthly basis per kVa.

 

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.

 

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.

 

 

 

New research indicates that landlords could have problems renting property that falls below new minimum energy efficiency standards.

The Energy Act requires new leases or lease renewals from April 2018 (and for all rented property from April 2023) to have a minimum EPC rating of ‘E’, with properties required to meet at least this threshold before landlords are able to let the space.

According to the Cushman & Wakefield report around 20% of commercial property currently has EPC ratings of F or G, making it unlawful to rent them from April next year, with 19% rated E. Owners of non-compliant property could be fined up to £150,000.

While there will undoubtedly be a cost to improving a building’s EPC rating it’s important to take the longer-term view that upgrading a facility protects, if not enhances, its value, while also making it more attractive to tenants increasingly conscious of operating and service charge costs.

There are a number of exceptions from the regulations, though owners will have to sign-up to a register opening in October 2016.