Posts Tagged ‘Electricity pricing’

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.

 

 

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.

 

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.

 

New research from Cornwall Energy has found that competition in the business energy market is greater than ever before – there are now 39 business electricity and 33 gas suppliers.

Coupled with low wholesale energy markets this should be good news for energy users, with around 24% of electricity consumption now supplied by new market entrants.

The plethora of suppliers and variation of tariffs and T&Cs also means the energy landscape is more complex than ever before, however. Ensuring that your understand your contract is important, for instance:

  • is the offer fixed price ie includes charges such as the Renewables Obligation, Feed-in-Tariff etc, or are these excluded from the unit rates and passed through by suppliers in addition to the published unit rate?
  • what happens if your consumption changes significantly – are there volume tolerance penalties that could be invoked if you use more/less than the annual estimated quantity in your contract?

A number of electricity suppliers are now offering innovative products that help avoid or reduce consumption at the most expensive times (generally mid-winter afternoons). As the price of electricity varies depending on when it’s being used, by reducing consumption at peak times you could make substantial savings – but it’s important to understand how suppliers do this and whether it’s appropriate for your operations.

Working with an experienced energy consultant means you can understand fully the various contract and product options and ensure that you gain both the best price but also the service and flexibility you need – so do get in touch.

With the dust settling on a surprisingly convincing Conservative election victory, the UK’s energy policy will now be delivered by a party with a significant climate sceptic wing and the absence of a green-hued Coalition partner, the Liberal-Democrats.

Energy trilema remains

The UK’s long-term energy goals will continue to be improving energy security, ensuring energy is affordable and reducing carbon emissions through low-carbon generation. The big question is how these three aims will be balanced, with a large segment of the Conservative party heavily sceptical of energy decarbonisation and the green agenda.

However, the announcement that Amber Rudd, an advocate for action on climate change, is taking over as Energy & Climate Change Secretary, along with the removal of the anti-windfarm/solar Eric Pickles as Communities Secretary, means that Tory climate sceptics have been kept away from key energy and environment positions.

The result is that there will likely be relatively little change in a slightly contradictory energy policy that will continue to prioritise decarbonisation while also blocking onshore windfarms and paying too little attention to energy efficiency.

Energy prices

More of the same is the most likely situation, with low carbon taxes and other non-energy costs (distribution, transmission etc) continuing to be the main driver of electricity price increases while the oil price remains depressed.

While Labour’s threat to abolish Ofgem has disappeared, the regulator will remain under pressure to increase competition and rebuild trust between consumers and the big 6 energy suppliers.

One election promise that the energy industry won’t be sorry to see the back of is Labour’s misguided (and rather pointless) pledge to fix energy prices.

Fracking future

One industry that will have cheered the election result is shale oil and gas extraction. The Conservatives have been vocal supporters of new domestic fossil fuel sources in the shape of shale fracking, which offers improved energy security and (possibly) reduced costs for consumers. There remain considerable questions about the commercial and social viability of fracking however, with community opposition set to exceed anything experienced by the onshore wind industry.

Despite these reservations, the push for fracking is set to increase during the next parliament, though rural and environmental group opposition could cause both the fracking industry and government a few problems along the way.

Other energy issues

While Amber Rudd and colleagues may advocate an energy policy including action on climate change, ultimately George Osborne and the Treasury will have the final say on key issues including:

  • negotiations with EDF about the new nuclear reactor at Hinckley and Austrian objections to the EU about state aid which could delay commissioning beyond 2023
  • the need to boost the UK’s nascent carbon-capture storage industry
  • setting carbon emissions targets for 2030 which will have a major influence on energy investment

 

According to the latest predictions from Smartest Energy, non-energy charges will account for 57% of electricity costs by October 2015 compared to 47% in October 2014.

There are several main drivers for this changeElectricity cost breakdown:

The impact on business customers is that the variable element of your energy costs – the electricity that comes through the wires – is having a decreasing influence on the overall price you pay. In practice this means that while wholesale energy markets are unusually low, prices have not fallen to the same extent.

Examples of how some of these charges are increasing include:

  • Feed-in-Tariff: forecast to increase to £4.51 p/MWH in 2016/17 from £2.54 in 2013/14
  • Renewables Obligation: forecast to hit £13.43 in 2016/17 from £10.565 in 2013/14

One of the key developments over the next few year is also the introduction of Contracts for Difference (CfD), a new government scheme under which low carbon generation is guaranteed a minimum purchase price in order to stimulate investment.

CfD costs will be low during 2015/16 as CfD generation begins output later in the year, with full year average costs expected to be in the region of £0.41 p/MWH, but will increase steadily to around £3.12 p/MWH in 2016/17 and £6.02 in 2017/18.

These developments mean that the price you pay for electricity is no longer as closely linked to trends in the wholesale energy market as before, which in turn means that the primary route to paying less is cutting consumption.

Slightly early for bonfire night, a major fire at the Didcot B power station lit up the Oxfordshire sky recently, raising further concerns about the UK’s ability to keep the lights on over winter. This was the third major fire at a fossil-fueled UK power station this year, following on from Ironbridge in February and Ferrybridge in July.

While the National Grid’s tried to downplay the risk of power cuts in its Winter Outlook, the margin between supply and demand could be as little as 4.1%, compared to 15% a few years ago.

The tightening margin is due to the closure of polluting coal-fired generation, breakdowns (and fires) at several plants, and new generation not coming on-line as quickly as expected.

The National Grid has measures in place to ensure supply include agreements with three power stations to make additional capacity available if needed, as well as the new Demand Side Balancing Reserve, under which large businesses are paid to reduce consumption at peak periods.

While a full-scale black-out has only a 5% chance, the likelihood of a brown-out has increased from 0.1% to 10% according to a recent study, which can have side-effects for electrical equipment.

Power cuts may remain unlikely but the UK’s slim capacity margin should focus business minds on energy efficiency and self-generation for both financial and security of supply reasons.

The National Grid warned recently that electricity prices could double over the next 20 years, with the wholesale cost increasing from less than £50 p/MWH today to over £100 by 2035. Gas prices could also increase from the current 70p per them to around 100p.

The impetus behind rising electricity prices is the continued closure of coal-fired power stations due to anti-pollution legislation and the higher cost of low-carbon generation (solar, wind, nuclear, biomass etc).

The National Grid highlighted the possible role of shale gas, which it says could meet over 40% of the country’s gas requirements by 2035. The report did not say whether this would reduce prices, however, which senior leaders in the fracking community have already said is unlikely.

While shale gas may not have a significant impact on prices, it would reduce the UK’s dependence on imports, which could reach 90% as North Sea output declines.

Businesses need to understand the implications on their cost-base of a possible doubling of energy prices over the next couple of decades and start putting in energy reduction plans now. Most organisations can mitigate at least part of this expected cost increase through reducing demand and investment in efficient technologies that deliver a decent ROI.