18 Aug 2022
All energy suppliers, to a greater or lesser extent, buy the energy they provide to businesses and households in the wholesale markets, it’s no secret these have been increasing rapidly. On June 30th 2022, gas and power prices in the wholesale market for Winter 2022 closed at 373 pence per therm and £342 per MWh respectively. That was a whopping 596% and 483% higher than on the same day last year(1); with the market showing no sign of receding.
An indicative energy cost stack based on a sample of medium-sized business (2), shows that on average this customer would have seen prices increasing by as much as 249% for gas and 148% for electricity compared to a year ago.
Some of the causes of these prices have been UK-specific whilst many have been international. There has been a strong demand for energy following the bounce back from covid, issues with supply from the United States and the conflict in Ukraine. As well as high renewables outputs compared to previous years.
Russia, once Europe’s biggest gas supplier, has already started to reduce exports to the region. According to Refinitiv (3), Russia exported around 3.7 billion cubic feet per day (bcfd) of gas since mid-June on the three main lines into Germany:
With limited supply in Europe this impacts our prices.
Wholesale energy prices which are also known as commodity costs hit record highs and as they represent the single largest component of a typical energy bill, retail prices are also at their highest levels. Non-Commodity Costs (NCC) have also increased. NCC are split into two main categories:
Whilst non-commodity costs (NCC) or third party charges have been gradually declining as a percentage of businesses’ energy cost stacks over the past two years, from a peak of 36% and 65% for gas and power back in Q2-2020 respectively (1), these have increased in absolute terms and are forecasted to continue rising in the coming years.
Going forwards, BSUoS costs are forecasted to rise even further from April 2023 as generators connected to the transmission network will no longer pay these charges, leaving end customer to pick up the tab (4). However, it’s expected that generators may be able to pass on some savings in the form of lower wholesale electricity costs.
Renewable Obligation (RO) and Feed in Tariffs (FiTs) have also risen during Q2′-2022 and are expected to keep rising over the next five years. RO and FiTs are government schemes to support the development of large and small-scale (< 5MW) renewable electricity generation respectively.
One of the key drivers for higher RO charges is the mutualisation of these costs. Following the collapse of more than 30 suppliers throughout 2021 and early 2022, many failed to pay their ROs and as a result, the shortfall is split across all remaining suppliers.
These costs were capped from January to March 2022 up to a limit of £200m, with any deferred costs to be spread equally across the 2022-2023 financial year. Ofgem's Targeted Charging Review (TCR) also modified how Transmission Use of Networks (TNUoS) costs are calculated, but these changes have been delayed until April 2023. In the short term, it’s expected that transmission costs will increase but after April 2023, these are forecasted to decline.
Sources & Notes:
30th June 2022
In "Energy News"
19th May 2022
In "Energy News"
29th January 2021
In "Energy News"
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