The past decade has seen a dramatic change in the makeup of energy charges, shifting from a cost primarily made up of the wholesale price of electricity to a cost primarily made up of various third party charges. Not only do these third party charges keep increasing in size, more of them are being introduced. The most recent being the Energy Intensive Industries (EII) charge which has been introduced in an attempt to mitigate further damage to energy intensive businesses such as the recent collapse of the steel industry in the UK.
EII is actually a tax break for businesses that are deemed energy intensive and has been designed to help industries such as steel become more competitive globally. The tax break will allow energy intensive businesses a potential 85% rebate against their Feed in Tariff (FiT) charges and Renewable Obligation (RO) Charges. However, as these businesses will now pay less tax on their electricity, costs will increase throughout the UK for businesses who are not energy intensive by approximately 1.5%.
The theory behind the scheme takes a view of reducing energy expenditures for industries that are energy intensive to provide them with more space to lower the price of their products, making it more attractive for foreign and domestic buyers. With cheep steel currently flooding the markets from China, UK steel production has suffered dramatically and it is hoped that reducing the cost of energy for the steel industry will help it to recover.
The wholesale cost of energy has been extremely bearish since the beginning of 2015, with the collapse of oil prices having a direct impact on gas and electricity prices. Oversupply coupled with a mild winter has pushed the price of gas and electricity down to the lowest level seen for years. However, the wholesale cost of electricity now accounts for only 45% of a businesses electricity price, which is why although the wholesale price has been in decline, significant savings are not making their way through to end users.
Other third party charges such as Transmission Network Use of System (TNUoS), Distribution Network Use of System (DNUoS) and Feed in Tariff (FiT) charges are also forecast to increase for the forecastable future, leaving the wholesale cost of electricity playing an even smaller part in the overall cost of a bill. Balancing Network Use of Systems (BNUoS) in the past was a relatively small charge, however it now makes up approximately 3% of a bill and is also anticipated to increase over the coming years.
Some potential good news for the future is that the Renewable Obligation (RO) will close in 2017 with the amount of money paid on a bill expected to be phased out from 2020 onwards. Businesses will therefore eventually start to see a reduction in this charge, which currently makes up approximately 17% of their overall electricity cost. Once this charge starts to decline from 2020 it is hoped that this will see a reduction in the overall cost of electricity, however some market sentiments suggest it will simply be swallowed up by other third party charges.
RO was introduced in 2002 to incentivise the building of large scale renewable energy projects. It requires suppliers to source a certain percentage of the electricity they provide to their customers from renewable energy. Any large scale renewable projects that are built up until the closure date will be given full lifetime support until 2037.
The energy landscape is evolving and costs are constantly changing which can be a huge issue for businesses wanting to budget for the next five years. It is becoming increasingly complex to fully fix electricity prices for a number of years, as suppliers are unsure as to how high third party charges will increase.
When a supplier offers a fully fixed price to a business, they take into consideration the cost of the third party charges over the duration of the contract period. However the longer the contract period, the higher the premium will be to cover the risk. Suppliers offer customers pass through contracts, where the third party charges are passed through and added onto bills as they increase in size. This can look very appealing to businesses, as the original price before the third party charges are added can be very low, however they must be wary of that price increasing throughout the duration of the contract.
The picture for gas is completely different to that of electricity, with the wholesale cost of gas making up a much bigger percentage of the total cost. This has allowed businesses to take advantage of the low wholesale costs and see very healthy savings on their bills.