Utility Week

28 | 23RD FEBRUARY - 1ST MARCH 2018 | UTILITY WEEK Customers Market view I n recent years there has been a great deal of emphasis on rising energy costs and what they mean for British businesses. The role of wholesale energy costs has formed a large part of this narrative. How- ever, to fully understand long-term energy prices it is important to drill down further into the make-up of energy contracts. First, we must understand what propor- tion of energy supply costs faced by busi- nesses actually comes from the "wholesale energy" component. For medium-to-large sized enterprises in the UK, energy costs represent roughly 70-90 per cent of their gas bill. So 10-30 per cent of the bill comprises non-gas costs. For electricity, this propor- tion is much larger, with non-electricity costs accounting for 55-65 per cent of the bill. This means that less than half the money busi- nesses pay for their electricity contracts cov- ers the wholesale energy price. In both cases, especially that of electricity, it is clear that there are significant non-energy drivers of contract price, which can affect businesses' bills in different ways. One major reason for these structural differences between gas and electricity are additional government schemes and green subsidies levied on electricity supplies, including Renewable Obligation Certificates, contracts for difference, the feed-in tariff, and the capacity market. The combined costs of these four subsidies over 2019 will average about £35/MWh, and the wholesale electricity price is £43.60/MWh at the time of writing. It's certainly possible that in coming years the cost of these subsidies and government schemes will surpass the cost of the energy component. As well as the subsidies, the other major costs going into both types of energy con- tracts are related to transmission, distribu- tion and balancing. These costs typically differ from subsidies in that they are meter- specific and vary by geographical area, meaning it is harder to generalise price movements. Furthermore, for electricity the tariffs are set at a half-hourly level, so the individual consumption characteristics of a given site have a larger bearing on the over- all costs incurred. These costs are currently also subject to regulatory change and uncer- tainty, with significant regulatory changes already under way or expected across distri- bution, transmission and balancing. The non-energy costs associated with the gas market are far simpler than electric- ity and are in essence transportation costs from the network operators in addition to metering charges. As with electricity, the gas transportation costs also vary by region and don't necessarily move in unison. As the energy market changes, suppliers need to be sensitive to the underlying driv- ers of energy prices, and aware of the inde- pendent ways in which the ultimate prices of gas and electricity paid by the customer can be affected. In some instances, it may be reasonable to expect a gas-supply contract price to decrease, while electricity prices remain the same or even increase. What's clear is that the prices paid by custom- ers are not simply a reflection of whole- sale energy prices and one role of the supplier is to communicate these dynamics to businesses and mar- ket participants. Another dynamic that could become more relevant in the current environment is the role played by inflation – specifically the retail prices index (RPI). Many of the non- energy costs across both gas and electric- ity have an RPI-linked element that drives future costings. As a result, an economy characterised by higher inflation should also expect to see higher energy prices, although it is most likely that non-energy costs will be the primary drivers. As a supplier to the business market, we have been calibrating our pricing and billing systems to better manage and control fluc- tuations in both energy and, perhaps more importantly, non-energy prices. A range of strategies can be implemented to provide cus- tomers with long-term stability, or short-term flexibility, with predictable and fair pricing. Brook Green Supply is owned by CF Partners, and benefits from added industry expertise and market insight from across a range of European energy markets to pro- vide the best product offering including both fixed and flexible contracts to business cus- tomers. The core to any supplier cracking this is a detailed understanding of the driv- ers of energy supply prices. Richard Nicholls, director, Brook Green Supply Bills: the sum of many parts Wholesale energy costs are just one component of customers' energy bills, and suppliers should be aware of the underlying drivers of energy prices, says Richard Nicholls. Key points Non-energy costs represent as much as 65 per cent of electricity bills, and up to 30 per cent of gas bills. The difference is the result of government schemes and green subsidies levied on electricity supplies. The cost of subsidies and government schemes could soon surpass the cost of the energy component. Many non-energy costs across both gas and electricity have an RPI-linked element that drives future costs. Suppliers must be sensitive to the underlying drivers of energy prices.

• Cover