Despite starting a new year with its promise of a vaccine rollout, the UK remained in the grips of the coronavirus pandemic and we entered a third lockdown. The question is, what does the business energy landscape look like now? How has this affected business energy prices? And how can your business plan ahead?
In this article, we take a closer look at the first quarter to see exactly how the energy market is shaping up. We analyse movements in energy prices that may affect your business, as well as discuss a significant new development on the horizon – the Targeted Charging Review – and how your business can plan a future energy strategy around it.
The impact of lockdown on business energy consumption
We’ve compared business energy consumption for a selection of business customers with a total energy consumption more than 150 kWh (excluding commercial and industrial customers). As you might expect, consumption for businesses was lower this year compared to last year during January and February but higher from the 23rd March. This is particularly true for Retail, which experienced a significant dip in consumption during the first lockdown. However, there are a few interesting takeaways as you can see from the charts below.
Figure 1: Retail (graph1) and business electricity (graph2) consumption comparisons for Q1 2020 v Q1 2021: Based on a selection of British Gas business customers with total energy consumption over 150 kWh
Retail and Manufacturing show a 30% and 33% increase in consumption respectively, for March 2020 v March 2021. And most striking is Manufacturing, which shows consumption levels over and above the same period last year, even though there were no restrictions in place for most of the quarter.
Figure 2: Manufacturing electricity consumption comparisons for Q1 2020 v Q1 2021: Based on a selection of British Gas business customers with total energy consumption over 150 kWh
As businesses attempt to navigate the changing landscape around lifting lockdowns, it’s likely we can expect more surprises like these when it comes to energy use. For that reason, you may find it beneficial to shop around for the best gas and electricity tariff for your business or get a new quote. Those businesses that take proactive steps now to implement a robust energy strategy are likely to be better able to adapt to whatever lies ahead.
So, what’s happening with renewable business energy?
2020 was the greenest year on record and this time last year renewable business energy broke through the 40% mark for the first time. However, it’s perhaps inevitable that we would see some of that momentum drop off. As this quarter shows, renewable generation currently makes up 36% of the UK’s power mix compared to 41% for the same period last year.
Figure 3: UK power generation by fuel type: BMRS Reports Elexon and solar generation from Sheffield Solar
The decline is primarily down to lower wind power generation, which decreased by 18%. Solar power has also dropped off, falling by 14% over the same period. And in contrast, the use of gas is on the up, rising by 22%. So, what is going on – are UK businesses losing their appetite for green energy? For Q1 this year at least, it seems other factors are at play.
The rise in gas is largely down to a greater reliance on gas generators due to high energy demand caused by low temperatures. Gas-fired power stations are vital in helping the National Grid balance the system, particularly through the Balancing Mechanism (BM), which can provide unscheduled generation to correct mismatches between supply and demand close to real-time.
Couple this with a run of cloudy and still days, and you can begin to see that when solar and wind dropped off, gas plugged the gap.
A closer look at business energy prices
A survey by the Department for Business, Energy & Industrial Strategy (BEIS), found that – no matter their size – businesses paid on average 14 ppkWh for electricity in Q4’20. That’s nearly 11% more than in the previous quarter. Based on these figures, the average price of electricity may have reached a new high during the first quarter of this year. However, since these prices have been rising steadily for a few years the news, although not entirely welcome for businesses, is at least expected.
Figure 4: BEIS survey of non-domestic energy prices March 2021
To understand why electricity prices continue to rise, we need to look at factors affecting business energy bills –namely commodity and non-commodity costs. The latter relates to the cost of the use of networks, government policies and levies, which have continued to spiral upwards. On a similar but even faster trajectory are commodity costs, which is the price of power in the wholesale market. In Q1 this year, commodity costs accounted for 41% of a business’ electricity costs; non-commodity costs accounted for 59%.
Figure 5: Business electricity cost stack: commodity and non-commodity forecasted costs for a sample business customer with a non-half hourly meter. Non-commodity costs include: Transmission & Distribution components (TNUoS, BSUoS, DUoS) and Charges & Levies (RO, CCL, CfDs, CM)
The sharp increase in commodity costs is down to the fact that a large amount of electricity used in the UK is generated by using gas. So, if wholesale gas prices go up, so does the cost of electricity. As you can see from the charts below, wholesale electricity prices tracked the surge in gas and increased by 10% month-on-month (MoM). And in January, when a severe cold snap caused gas prices to rise by 15% due to unprecedented demand from Asia, electricity prices did the same.
In February, wholesale gas and power prices (Summer 21) fell by 4% and 1% respectively MoM. This is down to milder temperatures combined with an increased number of gas imports into the UK, which put less pressure on energy prices overall. And in March – following the temporary blockage of the Suez Canal which stranded many Liquefied Natural Gas (LNG) cargoes destined for Europe for days – wholesale prices recovered.
Figure 6: UK power and gas wholesale prices for Summer 21, Winter 21 and Summer 22: ICE UK Settlement Prices
When it comes to gas prices, the BEIS states that businesses of all sizes paid on average 2.5 ppkWh for gas in Q4’20. That’s over 6% more than in the previous quarter. We can also see that wholesale gas prices increased in the last quarter too, making it the third quarter in a row that we’ve seen these prices go up.
Figure 7: BEIS survey of non-domestic energy prices March 2021
For gas, non-commodity costs are primarily made up of transportation and distribution costs. Although these have remained stable, in Q1 these fell to 33% of the cost stack (down from 35% in the previous quarter) due to higher wholesale gas prices.
Figure 8: Business gas cost stack: commodity and non-commodity forecasted costs for a sample business customer with a non-half hourly meter. Non-commodity costs include: Transmission & Distribution components (TNUoS, BSUoS, DUoS) and Charges & Levies (RO, CCL, CfDs, CM)
Looking forward to the year ahead
As we head into the second quarter of 2021, there are no signs that energy prices are slowing down. So if your business has been thinking about reducing costs through new energy efficiency measures, now is the perfect time to get a smart meter if you haven’t already. It’s a quick, easy way to monitor your energy use and identify where your biggest energy-saving opportunities lie.
But are there any other new developments on the horizon that might affect your business energy costs? The most significant, of course, is Ofgem’s Targeted Charging Review (TCR). As a result of the TCR, some energy suppliers will be changing the way they price their electricity contracts, so it’s important to understand what’s happening when and how your business energy costs may be affected.
The Targeted Charging Review explained
TCR is part of Ofgem’s wider review, which among other things, includes how national and regional operators recover the costs of maintaining, upgrading and balancing their networks. The aim is to make sure that network costs are shared fairly between households and businesses. The concern being that while the costs of maintaining the grid have been steadily increasing, these costs are also passed onto an increasingly smaller number of users. One reason for this is that homes and businesses have put in place energy efficiency measures that mean they’re less reliant on the national grid and take less electricity from it. Another is down to large industrial & commercial (I&C) businesses that have become savvier about reducing their reliance on the grid during peak periods to minimise their network costs.
Following the review, these three changes are taking place:
1 From April 2021, the method for calculating Balancing Services Use of System (BSUoS) will change from net to gross demand.
2 From April 2021 Embedded Benefits are being removed.
3 The methodology for calculating transmission charges (TNUoS) will change from April 2023 and distribution charges (DUoS) from April 2022. Residual charges will also change from net volume of consumption (£/MWH for HH meters and p/KWh for peak consumption for NHH meters) to a fixed charge system (£/day).
- HH meters be will be placed in one of four charging bands based on their voltage connection and on their agreed capacity level (kVA).
- NHH customers (classed as low voltage) will be allocated a band based on net volume of consumption.
- Every MPAN’s LLF will change to include numbers that will indicate a site’s charging band. This is expected to be completed by Sept’21.
What does the Targeted Charging Review mean for businesses?
With these changes in place, Ofgem believes similar-sized sites will pay roughly the same amount for using system. However, other consequences include:
- Removing Embedded Benefits will make onsite renewable generation less attractive
- Customers who have TRIAD avoidance measures in place will no longer receive the benefit of lower TNUoS costs or the Embedded Benefits associated with exporting electricity during peak time periods
- Conversely, energy-intensive businesses with no TRIAD avoidance measures in place, may see a reduction in costs
- Generally, for HH meters the higher the capacity, the higher the band and the higher the cost
- Some customers will benefit if they secure an agreed capacity reduction or voltage reclassification
- Suppliers will need to adjust their billing systems
One of the biggest challenges for energy suppliers is how to price accurately to cover these future costs and still remain competitive. Problems may arise if an energy supplier unnecessarily charges or overestimates their TCR-related costs ahead of implementation.
So, what should be next for your business energy strategy?
Rising energy prices coupled with the possibility of higher than normal TCR-related costs that may affect some electricity contracts, mean now is a good time to review your energy strategy. Everything from installing electric vehicle workplace charging to making the switch to renewable business energy, can help your business take significant steps towards reducing its carbon footprint and lowering business energy costs. If you need advice on planning and implementing the right strategy for your business, we can help.