RISING ENERGY BILLS: WHAT REALLY CAUSES THE INCREASE?

A cursory glance at recent energy news will show a wealth of stories around the increase in gas prices for the UK, and on the other side of the coin, the continued growth and reductions in cost for renewable energy generation. Many consumers and businesses alike could be forgiven for assuming that the significant growth in our energy bills is due entirely to the changes in wholesale energy prices, particularly as the UK slides further into a gas crisis as we juggle increased demand for baseload power with dwindling domestic production and a growing reliance on imports from Continental Europe. In truth, while changes in wholesale commodity prices do impact on your energy bill, their impact is significantly less than many people think.

Currently, wholesale energy costs make up around 47% of the average gas bill, and only around 38% for electricity. The rest of the bill is made up of a variety of additional costs, and it is the growth in these that is putting pressure on energy bills, rather than changes in the wholesale market.

Once the energy has been purchased, energy companies are faced with the complicated task of distributing it to the businesses and consumers that are buying it. As a result, for every unit of energy used, fees must be paid to keep the distribution network in good working order. These fees make up around 26% of gas bills, and 28% of electricity bills.

For electricity in particular, a major pressure on bills is the range of environmental and social obligations that are incorporated into end user bills. For gas this makes up as little as 1% of total costs, but for electricity can be as much as 14% of the total bill. Initially, these were primarily made up of the costs associated with the Feed-In Tariff, for small-scale renewable energy producers, and Renewable Obligation for larger ones, aimed at encouraging renewable energy generation by offering higher guaranteed prices for wholesale energy or payments for businesses or landowners that produced renewable energy.

Since 2015, the UK have been in the process of replacing these two schemes with a single substitute, the Contracts for Difference. While well intentioned, the earlier schemes rapidly grew to a point where they were no longer viable, offering what in hindsight were overly generous terms for renewable energy generators. While it was unavoidable that major changes were required, it leaves the UK in a difficult position as many FiT or RO eligible producers are guaranteed their agreed rate of return for a 20-year period. As a result, bill payers are saddled with paying not only the new Contracts for Difference scheme, but at the same time are required to continue to pay for an outdated system for renewable energy that has been shown to be ineffective and overly expensive. As a result, environmental levies will continue to make up a significant, and growing, portion of total energy bills for a significant time to come, with many RO and FiT-eligible schemes set to receive payments until at least 2030.

 

Driving us towards an energy crunch? The coming electric vehicle revolution

 

As part of a £3 billion clean air strategy, the Government has announce a ban on the sale of new diesel and petrol cars from 2040. The ultimate goal of the scheme is to ensure that every road vehicle in the UK is zero-emissions by 2050. While this seems a long way in the future, it marks a profound change for how businesses will approach their logistics.

A major drive to improve air quality, which has significant impact on health across the UK and particularly in major cities, is to be applauded. On the wider scale, even the significant £3 billion investment could be recouped in reduced costs associated with the health problems generated by poor air quality. A report by the Royal College of Physicians last year stated that poor air quality is a contributing factor to 40,000 deaths in the UK.

However, the scale of the change in terms of the energy required presents probably the biggest increase in electricity demand the UK has ever seen. With around 26 million cars, 4 million vans and a quarter of a million lorries on Britain’s road, the burden of powering these vehicles is staggering.

Before this new initiative was announced, National Grid were already warning of the threat presenting by the growth in electric vehicles to the UK’s energy supply and infrastructure. There are currently only around 90,000 electric vehicles on the UK’s roads, but figures forecasting a growth to 9 million by 2030 would see an increase in peak demand of as much as 8GW, more power than even the much heralded nuclear solution of Hinkley Point C is capable of producing.

Now even this figure does not reflect the true potential impact on out electricity infrastructure that the electric car revolution will have. Energy efficiency measures such as LED lighting and more efficient refrigeration have resulted in steadily falling demand for electricity in the UK, but the growth in electric vehicles will completely reverse this progress.

The UK’s current energy strategy is disjointed, and leaves us reliant on nuclear power with an excessive strike price and imported natural gas supplies. The next ten years needs to see urgent, radical reform to how we produce and source or electricity, or we will face a far bigger threat to our security of supply that the current issues we face during cold winters.

Businesses are forewarned that electric vehicles are likely to have a significant impact on the price of electricity, driving up demand exponentially in the lead up to the Government’s 2040 deadline. We are reliant on an effective Government strategy to deliver vastly increased amounts of electricity. Given the current picture, it would be foolish to depend entirely on the current or future governments to deliver this effectively, and businesses should look to work towards protecting themselves from the impact of climbing energy prices. Investment in energy efficiency, reviewing usage and careful planning are all key to protecting your business, with expert advice widely available to ensure that you pay as little as possible for your power, and the power you do purchase is used efficiently.

 

2018: THE YEAR OF ENERGY EFFICIENCY

With around 260 brokers and TPIs currently competing to manage the contracts and energy usage of UK businesses, many owners are left with the impression that making sure they are on the cheapest energy tariff is the most important aspect of managing their energy costs. In truth, the single most crucial aspect of managing energy costs for your business is simple: if you are using less energy, then you will be paying less for it. Making sure you are paying the right amount for your energy usage is of course important, but in an increasingly volatile and unpredictable market, eliminating as much as uncertainty as possible by reducing the energy usage of your business is the safest way to insulate yourself from spikes in price, as well as reducing your exposure to potential shortages.

The UK’s energy efficiency policy framework has once again fallen under the spotlight, with a poll of Environmental Industry Commission members showing significant dissatisfaction with existing Government plans to improve energy efficiency. There is a clear message that the majority of UK businesses actively want to engage with and improve their energy efficiency measures, and are frustrated at a Government framework that is failing to deliver the support and incentives to allow them to do that most effectively.

The Clean Growth Strategy, unveiled last October, states that the Government aims to improve energy efficiency in UK industry by 20% by 2030, and has launched a series of consultations to strengthen energy efficiency policy. 59% of respondents to the survey criticised the targets as not ambitious enough, including a significant 14% that roundly discredited it as ‘not ambitious at all’.

With this clear appetite for improved legislation, businesses that look to improve their own energy efficiency now face a two-fold benefit. As well as reducing their total energy bills by cutting down on the amount of gas and electricity they consume, they are also future-proofing themselves against more stringent policy that may be introduced further down the line, avoiding the expensive of option of having to quickly retrofit such measures to meet new legislation requirements.

Research from the Carbon Trust shows that the majority of businesses could use significantly less energy. Even when adopting only low cost or no-cost actions, most businesses can reduce energy costs by at least 10%. For those that dig a little deeper, a 20% reduction in energy costs represents the same bottom line benefit as a 5% increase in sales for many businesses.

There are a huge variety of means to achieve this end, varying massively in cost and difficulty. Many businesses can benefit simply from training staff to be more mindful of their energy consumption. From this basic start, the energy efficiency options available to businesses are myriad and continue to grow, and especially for SMEs, it can be difficult to understand which options best suit their business and sector.

Energy efficiency technology can deliver significant savings across a business, and by engaging with a trusted technology partner, you can access valuable expertise and guidance, ensuring you invest in the technology options that deliver the best results for you.

 

DCP 161 – What you need to know ahead of incoming energy capacity legislation

DCP 161 comes into force during April 2018, and could see business sites that exceed their allocated energy capacity face a hefty increase to their energy bills. Distribution Change Proposal (DCP) 161 will see new charges for half-hourly metered sites introduced for those sites that exceed the capacity they have been allocated under their connection agreement.

Energy-intensive sites are allocated a maximum import capacity, referring to the maximum amount of power that site can draw from the national grid at any given time. This is charged in pence per KVA per day.

Sites that frequently exceed the amount of power they have been allocated by the National Grid or their DNO place a great deal of additional stress on the system. Particularly during the winter months, our current system faces significant pressures surrounding security of supply without this added burden, and it an effort to combat this issue, Ofgem are introducing DCP 161.

Currently, excess power drawn from the grid that exceeds a sites maximum import capacity is simply charged at the same rate as agreed capacity, meaning there is no real incentive to avoid exceeded that capacity limit. Under DCP 161, punitive charges for exceeded import capacity will be charged at a higher rate.

If your business site currently exceeded your maximum import capacity on occasion, it is vital that you look at your overall energy usage and efficiency to avoid significant additions to your energy bills. While one option is to apply for an increased maximum capacity, this will likely require a significant fee, particularly in areas where the grid already faces pressures on capacity.

A more cost-effective option is to better manage your overall energy usage to ensure that your sites remain comfortably below your maximum capacity threshold. Energy efficiency solutions present one of the best ways to achieve this, although which solution provides the best support depends on how and when your site is exceeding capacity. For those businesses that are regularly exceeding agreed capacity during peak times, on-site generation, voltage optimisation, power factor correction and other demand management measures all present a valuable opportunity to reduce your usage below this key capacity limit.

Alternatively, if your site is exceeded capacity more consistently, it could indicate that an in-depth review of your overall energy usage and energy efficiency strategy could be the most effective strategy. For many businesses, even those that are currently exceeding their maximum capacity regularly, improved energy efficiency can ensure you cut down on your usage enough that you no longer exceed your cap, without the need for an expensive extension to your agree maximum capacity.

To find out more about the range of energy efficiency technologies and services we provide and how they may be able to save you from punitive DCP 161 charges, contact us on 01204 528672