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Predictions for the business energy market – Robert Buckley

Robert Buckley, Director of Cornwall Energy, gives his predictions for the business energy market.

Businesses locked-in to higher electricity bills by third-party costs

Energy contracts have a language all of their own, reflecting a complicated world of assets and trading.

An increasingly important term is ‘third-party charges’ used by suppliers to describe the costs in energy bills that are outside their direct control.

Suppliers, the argument goes, can control wholesale costs and their own costs to serve. But those charges they cannot—set by third parties—cover networks, policy and taxes.

Third party costs have been on a long-term rising trend driven by:

  • Policy to encourage energy efficiency by making energy more expensive. Most non-domestic customers pay the Climate Change Levy (CCL) on their bills. Many now pay for the Carbon Reduction Commitment Energy Efficiency Scheme too, though this not a charge that is levied by energy suppliers;
  • Policy to subsidise renewables generation through the Renewables Obligation (RO) and micro-generation feed-in tariffs (FiTs). In the future subsidies may be required for nuclear and other low carbon sources like carbon capture and storage; and
  • Investment to renew networks and ensure the electricity wires can cope with new low carbon generation.

The impact of third party charges has been felt most keenly in the electricity market, although gas third-party costs have also been on the rise due to the CCL and higher network costs. Traditionally 1st April is the date this impact is felt, as it not only marks the start of the new tax year but also the new charging year for electricity networks.

Already this year is shaping up to be no exception, and we can already begin to quantify what it will be:

  • The Treasury has already confirmed the CCL will rise by inflation to 0.541p/kWh for electricity and 0.188p/kWh for gas;
  • New price controls will apply that determine what the gas transmission and distribution companies, plus the electricity transmission companies, will be able to charge. The latter in particular look like allowing substantial real cost increases next April;
  • The cost of the Renewables Obligation (RO) is to again increase. The rise being triggered as significant quantities of offshore wind capacity come on to the system;
  • The cost of micro-generation feed-in tariffs (FiTs) is likely to increase probably by a quarter as new solar photovoltaics continues to be installed; and
  • Most electricity distribution charges are slated for real terms increases as their existing price control enters its fourth year of five.

All told, electricity third-party costs account for around a third of bills, so these increases will push delivered costs up without a compensating reduction in wholesale prices.

We, at Cornwall Energy, have calculated that, for larger consumers, a reduction of at least 10% in their wholesale costs, or suppliers’ margins, is necessary to hold delivered prices the same over the next two years.

Of course, customers are indirectly benefitting from renewed and lower carbon infrastructure, but the pressure from rising third-party costs is a pretty strong incentive to make sure you negotiate the best deal for your electricity contract.

These increases are even before we start to consider the costs of the government’s Electricity Market Reform (EMR) programme. This year we have seen power generators liable to pay Carbon Price Support (CPS) on the fossil fuels they burn. We can expect to see these extra costs passed through into higher wholesale prices, because the purpose of CPS is to correct the perception that the carbon prices created through the EU Emissions Trading Scheme are too low to encourage investment in power generation other than gas. CPS starts low, equivalent to about 0.2p/kWh or about1%—2% of bills, but it is set on a rising track to 2020.

As ever the incentives are there to buy and use energy, especially electricity, as efficiently as possible. You won’t be able to avoid the third party charges but you can at least get the nest deal possible on the variable costs such as the actual energy you use.

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