Business energy bills are set to be pushed upwards by a combination of wholesale energy price rises and increases in non-energy costs, such as government policies and network charges. The scale of these changes, as well as how businesses are reacting to them, was explored in research released on 24 February by The Energyst.
The report surveyed a range of professionals involved in business energy procurement. It found a sharp divide between firms in the extent to which they had prepared for upcoming rises in energy costs.
This was particularly evident in how companies said they had responded to the upcoming implementation of the government’s policy to ensure the security of Britain’s power supplies: the “capacity market”. The cost of the mechanism will show up on consumers’ electricity bills for the first time this winter.
Just over half (52%) of respondents said they had budgeted for the cost of the policy. But this meant that a substantial proportion (48%) of respondents had not budgeted; the report said that this indicated a need for better engagement from energy suppliers and brokers to help firms understand these costs, otherwise they may face “bill shock” over the year.
While less certain than non-energy costs, the report also warned that wholesale gas and electricity prices were set to rise in coming months.
Analysts at pricing firm ICIS have said that the current outlook is “certainly a more alarming supply demand balance than we have seen for many years on the UK power market”.
According to the ICIS Power Index, the average value of £45.937/ MWh in the last quarter of 2016 was the highest in two years, and was up by 16% on the same period of 2015. Higher short-term prices, the firm noted, tended to have a bullish impact on longer-term supply contracts.
ICIS also forecast rises in gas prices next winter as a result of reduced storage capacity.
Cutting the costs
The survey revealed few surprises in the issues prioritised by firms when buying energy. It said that cost was the key consideration for the vast majority (76%) of respondents. Environmental concerns barely registered, with 4% citing it as their priority.
Segmenting responses by sector, cost was particularly critical for commercial operators, with over four in five (83%) respondents citing it as the principal consideration for them.
Within the industrial sector, around two thirds (67%) of respondents cited cost as their overriding concern, but there was also some thought given to security of supply (cited by 22% as their key concern). In the public sector, cost remained the top priority, but to a lesser extent (56%).
The report further confirmed that many organisations were pursuing improvements to their energy efficiency as a priority. Almost half (45%) of survey respondents said they had set aside capital to invest in energy efficiency.
In general, organisations spending more than £1m were more likely to have set aside budget (59%) to invest in measures that reduced their demand. Of firms that spend less than £1m, just over a quarter (28%) said they had set aside a dedicated budget.
Across all sectors, LED lighting was the most common technology sought, and featured in roughly half of investment plans.
Given that cost was the key factor for most respondents when purchasing energy, the report noted that it was “unsurprising” that the majority also regarded this as the main factor influencing their decisions on energy efficiency investment. Under a fifth (17%) thought subsidies or incentives might unlock further investment.
The survey asked participants to suggest one action for the government or energy regulator Ofgem to take in 2017.
Certainty was a common theme: “set a cross-party 10-20 year plan for energy production / regulation / charges and to stick to it and not constantly alter policy”, said one response. “Think holistically about the future and vision of the energy market, and stop wasting money on short-term fixes with very low value”, said another.
One political event in the very near future could have a substantial impact on business energy prices. On 8 March Chancellor Philip Hammond will detail the government’s spending priorities in the Spring Budget, and key announcements for the future of the energy industry – such as spending on low-carbon subsidies – are expected.
Although much of the focus could be on how his announcements impact household bills, the effect on business energy prices in general and energy intensive industries (EII) in particular will also be important.
MPs on the business, energy and industrial strategy committee are already examining the impact of Brexit on the UK’s role within the EU’s carbon trading scheme: an example of how companies are already facing fresh challenges to their long-term planning.
What about water?
The report also provided some insights into businesses’ expectations for the opening of the water market to competition in April 2017. From that date, many firms in England will be able to choose their water suppliers for the first time.
Among smaller firms (<£1m energy spend), just over a third (36%) have considered switching. But the same is true of more than six in 10 (62%) organisations that spend more than £1mn/ year on energy.
Of those considering switching water supplier, almost half (44%) had not conducted a water audit. This is seen as key to securing the right deal.