Predictions for the business energy market – Lisa Waters
Lisa Waters, economist and Director of Waters Wye Associates gives her predictions for the business energy market.
Coming up is a big period for the wholesale electricity market with the government due to implement the finalised design of its new market reforms.
The capacity mechanism and new feed in tariffs for renewables heads into implementation.
The government will continue to talk to EDF about the cost of a new nuclear plant – or two, but I suspect most other investors will maintain their wait and see stance, waiting for energy policy to be clearly defined before spending more on new projects.
Customers will hope the details are all ironed out quickly so the much needed investment can be encouraged back to the market, as we need new plant to keep the lights on.
So what does this mean for the customers themselves?
Well with only new renewables projects, mainly intermittent wind, progressing customers are relying on the older power stations to keep the lights on. Based on fuel costs and plant types, combined with a toxic mix of energy related levies, this makes upward pressure on prices inevitable.
The problem facing customers is not simply the increases in wholesale prices; the “add ons” are going up. Many people remain unaware that energy itself makes up only around half their bills. We are all also paying for: investment in the wires; large and small scale renewables; carbon taxes and social policies. Using energy bills to raise what are effectively taxes is highly regressive, but is never the less an accepted policy position. This means the charges the energy suppliers collect are going up even if the wholesale prices come down. Each wind farm that comes on line adds to the cost of renewables for customers.
Wholesale prices are also unlikely to reduce in the next year. The price setting, or marginal, power stations are fossil fuelled plants, burning gas and coal. While there is much talk that shale gas could bring down gas prices, as it has in the USA, the UK is not yet exploiting shale and our gas prices therefore remain driven by international markets. The forward prices for wholesale gas for next winter are around 67p/therm, in the region of 11p/therm higher than today. Recently coal plant has been cheaper to run, but again we are sourcing coal globally and those prices are highly likely to rise as the global economy picks up. Add to fuel costs the increasing price of carbon – with the European Commission actively seeking policies to raise carbon prices – and generators’ costs are rising so power prices will to. Prices for winter 2014/15 base load power are currently around £53/MWh compared to the £44/MWh today.
The cost of investing in networks is also on the rise; it is not cheap to connect new power plants. These costs are spread between generators and suppliers, but as generators will pass them through in their output prices, customers will ultimately pay the lion’s share. These investments are badly needed, but the impact on energy prices will be unwelcome.
While the country continues its slow emergence frmo recession and the government pushes energy efficiency, the dampening of demand may help to stop prices going too high, but without investment in new, more flexible generation I still think the prices will rise.
On gas, the USA may invest in exporting some of its shale gas, turning LNG import terminals into export options, but the UK is unlikely to exploit its own resources in 2014. As noted above, the prices for next winter are already higher, but the spread between summer and winter prices do not look high enough to justify new storage. We may therefore see the government implement their “gas strategy” that asked customers to help support investment in “strategic storage”. Concerns about security of supply will inevitably rumble on and customers have to be worried that Ofgem will develop new “emergency” arrangements that could push up prices. Ofgem and DECC seem more likely to influence gas prices in the UK than the markets – unless of course we have continued political upheaval in one of the states that supply the UK with significant volumes of gas like Russia, via the Ukraine.
I think by the end of the year, as well as interventions from DECC and Ofgem, the Treasury may have become even more active in energy policy. The Levy Control Framework is the first serious attempt to monitor the cost of policies on energy customers, but the department may think that the balance has gone too far and try to rein in the green agenda in the name of saving businesses from spiralling costs. My hope is that we start to have a debate about whether customers are really happy to pay so much to “go green”, which they may well be, rather than everyone blaming the energy companies for spiralling bills, rather than spiralling policy costs.