Posts Tagged ‘Energy market’

There are a number of potentially misleading energy-related cold-calling techniques being used these days, often by offshore call centres, that businesses should be aware of to avoid signing contracts that aren’t in your best interests. Some of the more common include:

“I’m calling from your supplier – could you confirm your supply details?”

If the caller really is from your supplier they’ll have your electricity MPAN and gas MPR numbers, consumption and cost data; if they don’t treat with extreme caution as the caller is likely on a fishing expedition to gain your verbal agreement to an energy contract on which they’ll receive a hefty fee.

This only applies to smaller gas and electricity supplies (those on non-half-hourly meters), as contracts for larger gas and half-hourly electricity supplies cannot be agreed by phone.

“Our service is free”

Then ask the caller how they earn their money: if the answer is they get paid by the supplier then either they have an exclusive relationship with that supplier and you’re not getting a full market assessment (and probably paying a premium), or the commission they receive is added to your unit rates. Either way, you’re paying for the service.

“Working on behalf of…”

Beware of anyone who says they’re working on behalf of your supplier / the National Grid / distribution company or similar.

For instance, companies stating they work to support the National Grid by checking available capacity (kVa) on half-hourly electricity supplies are being economical with the truth at best.

Capacity assessments are a legitimate and useful cost saving exercise, but are completely independent of the National Grid – end users need agreement to reduce capacity from their local Distribution Network Operator (DNO) not the National Grid, who also don’t have arrangements with energy consultants to conduct this type of work.

Due diligence required

Ofgem’s initiative to introduce regulation to the energy consultancy/broker market has ended without resolution, so while there are many reputable consultants out there, Ofgem (and suppliers) have limited ability to crack down on the cowboys, putting the onus on businesses to conduct their own checks.

 

 

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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.

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

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.

Record low oil prices pushed electricity and gas prices to new lows during 2015, despite continued conflict in the Middle East.

Whether oil remains at its current level – currently about US$31 a barrel compared to US$55 this time last year – is the key question, with the usual range of predictions as to what happens next.

A slowing Chinese economy and the relaxation of sanctions on Iran are expected to maintain downward pressures during 2016 however, which is good news, though there’s always scope for the unexpected to reverse this. Issues to watch include OPEC reversing its current stance and cutting output, or a renewed flare-up between Ukraine and Russia leading to disruption of supply to Europe.

Commercial electricity prices are increasingly determined by non-energy costs, however, with low carbon policies and investment in transmission and distribution infrastructure now accounting for over 50% of electricity costs. This means that changes in the wholesale markets have less influence than previously, but as these non-energy costs will definitely rise over the next few years even a small increase in wholesale markets will start to see prices pushing higher quite quickly.

What to do?

  • While wholesale prices remain low it continues to be a good time to check renewal options for any contract due to terminate during 2016
  • Fixed or pass-through? When comparing prices make sure you know whether the offer is for a fixed contract (one that includes future increases in charges such as the Feed-in-Tariff) or pass-through (where future increases are passed-through to you)
  • Whenever possible go for the fixed option as it ensures you’re not hit with unexpected charges, while also ensuring that you select the best overall price, as a low-priced pass-through contract may turn out to be more expensive in the long-term

The prospect of a winter blackout came nearer this month as the National Grid had to ask the generators for more power due to breakdowns at a number of power stations.

The worry is that the UK’s balance between supply and demand is now so tight that if a breakdown on a warm autumn day causes the National Grid to issue a Notification of Insufficient Margin, what will happen if we have a particularly cold spell and further breakdowns?

News like this is normally enough to send energy prices surging, and although the response was muted this time, it’s possible that repeated supply warnings  (or even a short blackout) could cause prices to spike.

Businesses are enjoying some of the lowest energy prices for many years however this trend must come to an end sometime, and it could be that further supply warnings are the turning point for wholesale markets, bringing to end a period of benign energy prices.

Where possible it is advisable to quickly secure a long, fixed contract now to minimise any risk of increased energy costs, so do get in touch.

 

Initial results from a survey of company directors by The Energyst show that around two-thirds think that electricity prices will increase by around 10% next year.

The expected increase comes after a year of softening wholesale energy prices on the back of the low price of oil.

With most industry commentators anticipating price rises next year it’s a good time to be reviewing any contracts coming up for renewal during 2016. Even if your renewals aren’t until next August/September savings could be locked in now, so do get in touch.

 

 

Unless you’re tracking the wholesale energy markets daily, understanding the best time to renew an energy contract is extremely difficult – and leaving the renewal process until your current arrangement expires means you could be missing an opportunity for substantial savings.

Energy prices historically are often lower during the summer months, edging higher in the Autumn and Winter, so beginning the renewal process early means you can test the market to assess your options: if they don’t look good or you think the market will fall, then wait a bit and try again.

Just as energy markets can have seasonal variations, the market is also vulnerable to spikes and shocks, anything from volatile relations between Ukraine and Russia, to Euro-zone economic scares and OPEC oil production decisions. Understanding the difference between short-term prices shocks and longer-term trends is therefore vital, something a good energy consultant can advice upon when timing your next contract.

If the market is low, why aren’t my costs?

Despite record lows in the wholesale markets, you may not experience clear savings on your next electricity contract due to the plethora of third-party (or non-energy-charges) which now constitute around 50% of the overall cost of electricity.

These charges include transmission, distribution, taxes such as the Renewable Obligation, Feed-in-Tariff and Climate Change Levy. Two new charges will also add 4-5% to electricity bills by 2020: Contracts for Difference and Capacity Market charges, which are aimed at boosting low-carbon generation.

All inclusive or pass through

Depending on your specific contract terms, third-party charges can be:

  • all-inclusive or fixed so that they’re the same throughout the contract life, meaning you know what you’ll pay. On longer contracts suppliers will include a premium to cover future increases in these costs. These non-energy charges will either be incorporated into your kWh unit rate or itemised separately
  • pass-through: billed to the customer at the rate charged to your supplier, so not included in the unit rate. A pass-through contract avoids the supplier premium of an all-inclusive contract, but means you have the risk of future increases in these charges, along with an element of budget uncertainty.

It’s vital to understand which charges your contract does and does not include, otherwise it’s very hard to compare prices like-for-like, as a seemingly low unit rate may not include third-party charges, resulting in a misleading comparison with all-inclusive rates. Working with a reputable consultant can help avoid these pitfalls.

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.