Everything you need to know
As well as completing the many essential tasks involved in running a business, many directors and owners will also be pouring over the energy price news especially if they’re due to sign a new deal for an energy supplier in the coming weeks.
There have been recent announcements regarding support to businesses to help offset the rise in energy prices from October 1st, which is even more critical as companies are not protected by the domestic energy price cap that householders can rely on to an extent.
Whether it takes the form of grants, loans, discounts or caps on the amount suppliers can charge, or on the wholesale prices energy generators can charge to suppliers themselves – it will have an impact on the calculations when trying to get a new energy deal or a better one.
But one question that might help better inform directors and business owners is why energy prices have risen so high in the UK at the moment and what can realistically be done to bring them down.
One of the main issues that cannot be ignored is the impact on prices caused by the Russian invasion of Ukraine and subsequent sanctions on Russian energy exports.
The main supply route from Russia to Germany and the rest of Europe has reduced and actually ceased this month temporarily causing the price of natural gas to rise precipitously.
Out of contract gas rates have risen by an average of 180% and out of contract electricity rates have risen by an average of 130% since August 2021.
Wholesale energy prices are important here – and are currently at record levels. The reason why is that suppliers buy energy from the wholesale market then sell it to domestic and business energy customers.
When wholesale prices go up, these suppliers then increase their rates to cover the additional costs pushing the bills up for their business customers.
Chris O’Shea, chief executive of Centrica, the owner of British Gas, said: “The market suggests the high gas prices will be here for the next 18 months to two years.”
A business on a fixed-rate deal will be protected from any price rises that occur during the mid-contract period but will be looking at increased rates when their renewal comes due.
According to the latest figures from Ofgem wholesale gas currently costs more than 420p per therm (approx. 29 kWh) and wholesale electricity is at £439 per MWh (approx. 1,000 KWh).
Based on these figures, the average yearly costs for businesses depending on their size can be quite significant but all have one thing in common – they are rising.
|Average gas prices per kWh
|Gas costs per year
|Average electricity prices per kWh
|Electricity costs per year
|Total yearly energy costs
|100 or more employees
Looking at the most recent monthly variations the price of gas almost doubled between the beginning of June and the end of July.
Similarly, the price of electricity has also almost doubled over the same period.
But there are specific different reasons why wholesale, UK and renewable energy prices have all reached such high levels.
Wholesale energy prices
We’ve already mentioned the Russian invasion of Ukraine and subsequent ramifications but there are other issues that have affected the price. These include:
- The prolonged cold winter in Europe between 2020 and 2021 depleted existing natural gas storage capacity
- Higher demand for liquefied natural gas (LNG) from Asian markets has led to lower LNG shipments to Europe.
- The reduction and subsequent closure of the Nord Stream 1 pipeline between Russia and Germany
- The permanent postponement of the Nord Stream 2 pipeline which was an additional link between Russia and Europe across the Baltic Sea with capacity to send 55 billion cubic metres of gas a year directly and importantly bypassing Ukraine altogether. The pipeline was physically completed but Germany stopped it from becoming operational as a result of the invasion.
- Demand increased hugely as lockdown restrictions eased across the world, further lowering supplies
UK Energy Prices
- Lower renewable energy generation – lower winds along with outages at some nuclear power stations within the UK, means that a higher percentage of our electricity generation is using gas as part of its production process. Customers on green energy deals that provide 100% renewable electricity will see their rates increase as a result.
- A fire at a National Grid site in Kent disabled a power cable that ran between England and France and was used for transporting energy between the Uk and the continent. This is not expected to be operational again until 2023.
- Low gas reserves – The UK has some of the lowest gas reserves in Europe and has no means of stockpiling gas to use when required. UK capacity is approximately 2% of the country’s annual demand compared to an average of 25% for other European countries or 37% for the four largest storage holding nations.
- Not enough institutional financial backing – While government support and intervention is welcome, other nations such as France have offered stronger measures such as a hard cap on electricity price increases at 4%.
- Energy market weakness – as we’ve previously reported – 28 UK energy suppliers have gone out of business since 2021 and several of the remaining ones might be trading whilst insolvent. This can be down to their business model not having capacity to cope with the record rise in wholesale energy prices but all saw business and domestic customers’ bills rise to help absorb the costs.
Some companies have signed up to green deals that offer only 100% renewable energy but their prices have risen too despite no gas being used to generate it. So why have their prices risen?
Primarily it’s because of how the UK’s energy system works.
Renewable energy accounted for nearly half of the UK’s total energy generation in the first three months of 2022 with 45.5% but gas powered plants are still relied upon to generate some of the rest.
This is where pricing becomes more important. Prices are set using a system called marginal cost pricing which means that the most expensive type of energy is the one used to set the price for all other types including renewables.
As electricity prices are not set on the costs of wind or solar generation, they are set on the cost of the last source to meet demand and as gas powered stations are the ones used to top up and meet shortfalls in UK electricity demand, the cost of this is then used to set the price for all electricity.
What support is there for businesses?
We’ve written about what support the government has announced for businesses here but briefly the measures are limited to a new six month scheme for businesses and other non-domestic energy users such as charities, schools or other public sector organisations.
After this initial period, there will be more focused support for vulnerable industries expected to include restaurants, bars and other hospitality businesses. There will be a review in three months time to consider precisely where this should be targeted.
The government also announced that they are pursuing several different strategies aimed at reducing the overall cost of energy including the announcement of a new Energy Supply Taskforce that will look to agree long-term contracts with suppliers to reduce the price they charge .
They are also launching a joint Energy Markets Financing Scheme with the Bank of England which will provide some redundancy and support for firms in the wholesale gas and electricity markets and allow them to access short term financial support as a lender of last resort.
A series of measures have been announced aimed at accelerating domestic energy supply and resilience and building towards a goal of making the UK an energy exporter by 2040. These include:
- Issuing 100 new oil and gas licences
- Lifting the moratorium on UK shale gas production also known as fracking
- Continuing progressing towards a goal of generating 24GW of power by nuclear sources by 2050
- Undertake fundamental reforms to the structure and regulation of the energy market based on the results of a new review on UK regulation
- A review to ensure that net zero commitments by 2050 are met in an economically-efficient way.
This time is critical
These next few weeks will be vital for a lot of businesses trying to secure their immediate futures and energy bills are just a small if vital component of the whole picture.
While they’re waiting for the energy support to be fleshed out and implemented, they can use the remaining days and weeks to greater effect by making sure their business is as robust and resilient as it can be – starting with getting some independent, impartial and professional advice.
Once they have a clearer idea of the situation then they will be able to go through the available options – which might be a lot more than they thought they had.
This is a critical period, especially if the support isn’t as generous or as wide ranging as business owners thought. So use it wisely and so your business is well supported no matter what happens this autumn and winter.