The price of energy is an important cost to businesses. We explore the key components of energy prices and what might happen during 2018 to affect these.
Energy costs broadly comprise:
Wholesale price – the raw cost of the energy
Infrastructure charges – for managing the distribution of energy to the customer
Taxes and levies – devised to deliver future security of supply and environmental objectives
1. Wholesale price
Like any other commodity, gas and electricity are traded on a wholesale market. The timing of a supplier’s buying decisions determines this element of the cost.
Current wholesale prices are relatively high. Factors which will affect them going forward are:
- Increased demand (due to weather and economic recovery)
- Reduced supply – problems with the delivery of gas from outside the UK or generation of power within the UK
- Increased oil prices
- Currency exchange – a weak pound means higher prices
- Falling demand
- Increased localised generation and battery storage
- Currency exchange – a strong pound means lower prices
2. Infrastructure costs
The main costs are management of the wires and pipes that distribute energy from power stations and gas hubs to the user. These regulated costs represent over 20% of total prices.
Though the overall costs for this are unlikely to change significantly, the move away from centralised to localised generation will change charging structures. This will impact different customers in different ways.
3. Environment taxes and security of supply charges
There are a range of charges devised to encourage investment in future electricity generation, whilst achieving our commitments to lower carbon emissions.
These charges are under review and may change, however the overall cost will increase over the next few years.
|Environmental and supply related taxes and levies|
|RO – Renewable Obligation||A financial obligation on suppliers to support large new renewable electricity generators.|
|FiT – Feed in Tariff||A charge on suppliers to fund and promote the uptake of small-scale renewable electricity generator projects. Also a payment to generators of renewable energy from these schemes.|
|CCL – Climate Change Levy||Tax on business customers, providing an incentive to increase energy efficiency and reduce carbon emissions.|
|CM – Capacity Market charges supplier costs||A mechanism to ensure sufficient capacity is available to meet future demand. Provides payment to generators to encourage new investment, or maintenance of old capacity.|
|CFD – Contracts for Difference (Also called FiT CFD)||Supports large-scale low-carbon generation schemes by guaranteeing a minimum price that the generator will get for electricity generated in the future, thereby encouraging investment.|
4. Customer Choices
Customers have many options to mitigate these costs:
- Tender optimisation – ensure you are paying the best price
- Length of contract – consider longer-term deals which can protect you from future price increases
- Pass-through contracts and demand side – change the time of day that you consume energy to avoid expensive periods
- Buy flexibly – break your purchasing into blocks to spread the timing risk
- Invest in on-site generation to reduce the amount of energy you import
- Battery storage – store energy generated on-site and use this during peak price periods
5. Look to the future
Conventional wisdom suggests that prices will continue to rise as resources are depleted, charges to ensure future supply and sustainability increase, and the costs of infrastructure rise to meet the growing decentralisation of generation. However, there is room for hope that this will not continue forever:
- The completion of Hinkley Point should deliver a significant amount of baseload to complement intermittent renewable generation
- Battery storage and schemes to support small scale generation at peak times can offset our reliance on expensive gas
- As we hit our low carbon targets, and if the supply we need is secured, then the need for taxes will diminish
For more information about energy management, please contact me for a discussion about how I can help you move to the next level:
Chris Barrett – 01823 429990 – 07763 253072 – firstname.lastname@example.org[photon_no_cache url=”https://auditel.co.uk/wp-content/uploads/2018/01/chris-author01.jpg”]