Will Energy Prices Continue to Rise ?

Energy prices have been a hot topic ever since Ed Miliband’s party conference speech last year when he promised to freeze prices if elected. There seems to be a general conception that prices only ever go one way (up!) and that there is little that can be done to combat the seemingly continuous price hikes from the Big Six energy companies. It’s hardly surprising that this view is so widely held, given the constant stream of stories in the media about household energy prices, but you may be surprised to learn that five of the Big Six ( Npower, EDF, Eon, British Gas, SSE & Scottish Power) actually cut their prices at the end of 2013. That didn’t make the front pages though!

So what is happening with energy prices? Well before I offer my opinion it might be useful to understand how the suppliers arrive at the price you pay per kWh.

• Over half of the price is derived from the wholesale market rate.  Business energy prices are calculated daily, and like any commodity the market can move sharply. Supply problems, such as a generating plant closing for maintenance, natural disasters, economic factors and even the weather all affect the market…. If the wind doesn’t blow in Germany prices start to rise! The wholesale price has been relatively flat for some time now, and was even starting to fall before the Ukraine crisis. Timing your purchase correctly can make a big difference to the price you pay
• Another major factor that contributes to the price per kWh you see on your bill are Use of System ( UoS) charges. These charges cover the cost of moving electricity from the generating plant to where it is needed and can vary hugely from region to region. They are unavoidable; however you can reduce their impact through good energy management.
• The energy sector is facing an enormous investment challenge. Coal fired power stations are being closed to meet environmental targets and their output needs to be replaced. Ofgem has estimated that the UK needs to invest around £200bn into generation, the electricity networks and the gas infrastructure, at a rate over double that of the last decade.
• An increasing proportion of energy bills fund green energy initiatives through charges such as the Feed in Tariff, Renewables Obligation and the Climate Change Levy, all of which are designed to encourage the generation of electricity from renewable sources. Currently green energy only contributes around 11% of our electricity and if this proportion is to rise serious investment is needed. Some suppliers include FiT and RO in the price per kWh, others don’t. Make sure you know what you’re being quoted for. By the way, there’s an interesting (well, I find it interesting!) site here http://nationalgrid.stephenmorley.org/ which shows how our ebergy is being generated  at any given moment.               
• Finally, of course, the suppliers need to make a profit. How much varies depending on whether they’ve filled their order book or have spare capacity which is why it’s essential to get a quote from as many suppliers as you can, not just the Big Six.

So, are energy prices going to rise or fall?

In the face of a flat wholesale market and rising investment costs and taxes, it would seem obvious to assume prices will increase but probably the most informed people to ask, the suppliers themselves, seem to think they will fall. Energy companies have to build a large element of risk into fixed price contracts and normally you have tended to pay a premium of about 10% for a longer term contract. Currently, however, we are finding that the cheapest contract price is actually the 3 year deal, which is quite unusual.

There are many factors at play that could be causing this anomaly. There’s no doubt that the furore started by the Labour leader has had the PR departments at the Big six working overtime, but this long term pricing strategy seems far more reasoned and considered than a knee jerk reaction. Perhaps Ed Miliband’s wish to control the energy markets has come true, purely by stimulating the market forces he derided in the first place. His speech definitely caused the Chancellor to think again about how to fund the UK’s clean energy drive and there now seem s to be a real possibility of the ‘green’ tariffs going into general taxation, a move the energy companies themselves have already stated they would support. Another major factor to consider is shale gas. Very soon the US will be a net energy exporter for the first time in many years. This will only push prices one way, and British Gas is already buying future supplies from the US in anticipation.

There are other factors to consider, but the general message is that the energy suppliers themselves feel the market will stay flat or actually move down over the next few years.   This may, or may not happen, but that is the gamble the energy companies take whenever they price a contract.

Ian Hopping is a cost management specialist and utilities analyst at Auditel.

Set up in 1994, Auditel delivers highly effective cost management solutions to organisations throughout the country across almost all areas of business expenditure.

If you want to contribute to the Chamber blog, contact us on hannah@brightonchamber.co.uk