Rise in electricity prices gives occupiers and landlords a shock

With wholesale power prices currently at levels similar to 2013, why are landlords and occupiers seeing increases to their electricity costs? The answer is: non-commodity costs. In a standard electricity invoice, the pence per kWh price comprises both the wholesale cost and non-commodity cost. Less than 50% of the price is a direct result of the wholesale cost of power. What goes into the “non-commodity costs”? Broadly, the costs can be separated into the levies and costs incurred by the running and management of the national grid. The table lists all current charges considered as “non-commodity” that would make up around 66% of the costs of electricity for a normal business consumer. There is also a new cost on the way that is associated with the recovery of the Energy Intensive Industry exemption. Extremely large energy consumers will be given exemptions for certain levies within their electricity invoice in order to alleviate some of the costs incurred. The remainder of UK businesses that would not qualify for these exemptions will pick up the difference. Which costs have the biggest impact? ■ Distribution use of system (DUoS). This is a charge that pays for the physical distribution of electricity across the grid into businesses. This is expected to increase by nearly 5% from 2018-19. As it is a relatively large segment of the cost, the monetary value is significant. DUoS is also charged via certain colour-coded time bands to help manage demand on the grid, with red being the most expensive time, amber in the middle and green during off-peak hours. As of 1 April 2018, the level charged during red times will be reduced, thus raising the cost of consuming electricity during amber and green hours. This will reduce costs for those consumers that use electricity during peak hours, but increase costs for those that use energy at off-peak times, such as the leisure industry. ■  Transmission use of system (TUoS) is a cost associated with moving electricity from power stations to the distribution network. As the sources of power in this country become more complex, the cost of carrying out this service is increasing. In 2018-19 it will rise by nearly 15%, which for a business spending around £1,000 per month will equate to roughly £8 more on its electricity bill. ■  The renewable obligation levy is designed to enable increased investment in large-scale renewable projects. It will increase by 13.47% over the year, resulting in a rise of more than £2,500 for a business premises spending roughly £120,000 pa on electricity. ■  Contracts for difference are a recent addition to non-commodity costs. These allow for a guaranteed price for the production of electricity to be offered to generators of low-carbon energy. For example, if a new nuclear power plant has been guaranteed a price of £60 per mWh but the wholesale selling price is currently £50, they would receive an extra £10 per mWh funded by this charge. This is due to jump by a dramatic 80.77%, marking a large increase to consumers’ invoices. ■ Capacity market mechanism: the largest increase and largest individual non-commodity cost is designed to maintain sufficient and reliable capacity on the grid, thus ensuring that “the lights stay on”. This sharp increase – equating to more than £200 on a £12,000 yearly invoice – should provide money to invest in the new generation and keep existing generators online. What would it take for costs to start falling? On the non-commodity side, it would need a major shift in policy away from renewable sourced energy and far more security of supply to ensure that there are no issues with demand on the grid. It is therefore extremely unlikely that this part of the cost make-up will reduce. As can be seen by the graph, the biggest shift in the past 16 years has been from coal-fired power stations to renewable sources (mainly solar and wind). Regarding the wholesale costs that make up the remaining 34% of costs, it is impossible to predict the future. However, to neutralise increases in non-commodity costs, the wholesale price would need to reduce from current levels by more than 20%. This is extremely unlikely, so it would seem that all “normal” business consumers will see their prices increase. With energy prices increasing, it is therefore vital that landlords and occupiers do everything possible to reduce consumption and ensure electricity contracts are tendered to the full market to ensure best value. It is also important to ensure that the individual meter consumption “shapes” are reflected on these tenders – particularly with a view to the change in DUoS charges. By comparing prices accurately based on relevant consumption, the best possible rates can be applied to mitigate the increases over the coming years. Joe Warren is a director at ZTP, a strategic energy management consultancy that works with the real estate sector and other organisations to help them manage their energy and procurement requirements