The changing face of electricity contracts | News

Interested in having the resources to do more? Discover how you can spend more time achieving your goals and reaching your full potential with ERA Group.

ERA Group is a network of 1,000+ specialists worldwide. We always have local expertise on your doorstep. ERA’s large network and depth of industry knowledge ensures our consultants deliver Value through Insight to your business.

Whether you would like to set up an initial meeting, gain more valuable insight into your industry or start the cost optimisation process, we can help you achieve your business mission and enable you to spend more time focusing on new initiatives and innovation, helping your business succeed.

Over the last 2 years, wholesale energy costs have fallen month on month and in early 2016 were at the lowest levels seen since 2007. Whilst many factors have been in play in bringing down energy costs, the main ones include low oil prices, an abundance of supply, milder winters and bearish sentiment regarding global economies.

Since April prices have started to increase slightly however as can be seen in this graph, wholesale costs remain very good value.

Consumers might naturally anticipate that a large fall in wholesale pricing would result in a similar reduction in their total energy costs. Unfortunately for electricity in particular, lower costs have not necessarily resulted in a commensurate fall in the final delivered price and it is worth exploring why this is the case.

For electricity contracts, the actual energy element now makes up less than 50% of the total delivered cost. This % is getting lower and lower and while wholesale costs have been falling, other elements that need to be factored into total contract costs have been rising.

In addition to the commodity cost, contracts comprise a number of other charges. Without looking into all of these in depth, Network and Environmental costs now make up between 30% and 35% of such costs:

Network Costs

These costs relate to the infrastructure required to deliver energy from the power station. These fees, mostly regulated by OFGEM, are to use the transmission and distribution networks so the energy can be delivered to the end consumer.

Substantial investment is needed in both the transmission and distribution networks over the coming years to upgrade ageing infrastructure and ensure it is adequate to cope with future demand. Costs have therefore been increasing each year in order to fund this investment

Environmental Costs

Energy suppliers have to contribute to certain Government initiatives. These include environmental programs that reduce carbon emissions, such as Renewables Obligation, Feed in Tariff and Contracts for Difference.

The cost of funding these initiatives is passed onto the end consumer by suppliers and has almost trebled since 2012.

Looking Forward

Whilst the wholesale market has started to rise slowly, it is unknown what will happen in the future. This is a particularly uncertain time more-so given the UK’s recent decision to exit the European Union and the consequential fall in the value of Sterling. What is more certain is that both Network costs and Environmental costs are likely to continue increasing over the coming years.

Transmission and distribution infrastructure require significant further investment and new environmental schemes are continually being put in place. Whilst the commodity cost will continue to fluctuate with the normal dynamics of supply and demand it is likely that the non-commodity or pass through components within power contracts will form an increasingly greater % of the actual final delivered cost.

In summary, even if wholesale prices continue at the low levels seen over the last 12 months, businesses will not see as dramatic a fall in electricity costs as they would no doubt like.

Back