The cost of Electricity is made up of 7 primary elements, the wholesale costs, the Network Transmission Costs, Environmental and Social Obligation costs, Supplier Profits, Operating Costs, VAT and Other Direct Costs.
Your energy supplier buys gas and electricity so it can supply it to you. The cost to produce electricity varies due to many things but its primarily linked to the price of oil.
These include the cost of building, maintaining and operating the electricity wires which deliver energy directly to your organisation. Suppliers are charged for this and pass on these costs in the price they charge you for energy.
Environmental and social obligation costs
These are the direct costs to suppliers of government programmes to save energy, reduce emissions and encourage the take up of renewable energy.
These are the costs associated with running a retail energy business including, sales, metering and billing. This includes depreciation and amortisation.
Supplier pre-tax margin
This refers to the profit that suppliers make, measured as their earnings before interest and tax (EBIT).
Other direct costs
Other direct costs refer to market participation costs including Elexon/Xoserve admin costs, brokers’ costs and intermediaries’ sales commissions and any ‘wider’ smart metering programme costs (e.g. Data Communications Company related costs).
On the Rise….
Two of the seven elements that make up the electricity price are on the up. The Environmental and Social Costs Element are increasing substantially due to the EMR charges. The price of producing the units of electricity have also risen, primarily driven by the recent rising price of Oil.
Electricity Market Reform (EMR) Charges
EMR is a government policy which aims to incentivise investment in secure, low carbon electricity, improve security of supply and improve affordability for consumers. The two elements of EMR that will directly impact energy bills are Contracts for Difference (CfD) and Capacity Market (CM)
What are Contracts for Difference?
CfD is a new support scheme which will provide long-term revenue stability, new low carbon initiatives. It pays low-carbon generators for their power to incentivise development of new projects, paid for by consumers. It will replace the current Renewables Obligation (RO) scheme which ends for new projects in 2017, although RO costs will still be seen on bills until all existing RO contracts end.
Low carbon generators over 5MW can bid into an auction to secure a CfD contract which guarantees to pay them the difference between the ‘strike price’ (the price to generate the electricity including the cost of investing in low carbon energy) and the ‘reference price’ (the average market price for electricity in the GB market).
It is expected that the cost of generator payments (CfD Supplier Obligation Levy) will increase as more CfD projects are completed and begin generating.
What is the Capacity Market?
The Capacity Market will help ensure security of electricity supply by paying generators to provide capacity to the grid in times of peak demand. Generators can bid in an auction and successful bidders are awarded Capacity Agreements which provide a stable financial return in return for a commitment to deliver energy when required.
CM charges will only apply to consumption during winter peak periods. The cost of these capacity payments to generators, as well as scheme operational costs, will be paid for by consumers as part of their bills. The cost of payments to generators (the Capacity Market Obligation Levy) will only be felt once capacity secured in the auctions is delivered from late 2016
How much will these cost be?
Published estimates from the Government suggests the bill increases could average £10/MWh (1p/kWh) in 2020 for nondomestic consumers. EMR charges will apply to both HH and NHH supplies.
The Price of Oil
The price of oil has been steadily rising since it hit a 10 year low in January 2016. Therefore, if you are coming out of a 12 or 24 month term contract the comparative price of oil may well be higher today than it was when the last contract was signed. This is especially the case for customers who signed to enter a new contract in January 2016, coinciding with the decade low oil price.
The current oil futures markets are showing an expected 20% rise from today’s price compared to January 2019. These expected rises coupled with the increased EMR charges and uncertainty surrounding Brexit are giving us enough cause to suggest to our clients that the lock in longer term contracts at today’s market rates.