June 2014
Ofgem’s latest Supply Market Indicator report was released at the end of June 2014.
This regular monthly update, released on the last Thursday of each month is most renowned for its forecast of the average bill for gas and electricity, however there are significantly more interesting insights than the headline price. Not least Ofgem’s explanations and forecasts.
Today we take each of the relevant June numbers in turn and dig a little deeper.
Wholesale Prices
Ofgem report that in the decade to the end of 2013:
- Wholesale electricity prices rose by 150%
- Wholesale gas prices increased by 170%
But since December 2013:
- Wholesale prices have been falling.
- Wholesale gas prices are now 34% below this time last year having reached their lowest level since 2010 in early June
- Wholesale electricity prices are now 22% below this time last year having reached their lowest level since 2010 in early June Forward prices for gas and electricity have also fallen.
- Compared with last winter, gas and electricity prices for the coming winter are 16% and 10% lower.
Ofgem attribute these falls to mild temperatures across Europe meaning gas storage remains at record levels.
What Ofgem do not mention is the external pressure on prices from the geo-political issues in Syria, Iraq and Ukraine, the continued level of lower demand than pre-recessionary times and the urgent need for new generation infrastructure to meet demand at a time of rampant decommissioning.
This perfect storm of market influences is happening right now, not that you’d tell that from Ofgem’s narrative. And of course the decrease in the last 6 months pales against the increases of the last decade.
Network Costs
Ofgem report that for the 15 years following privatisation, charges paid by suppliers to transport energy to customers nearly halved.
This is an important point in that it illustrates that de-regulation of the industry had positive economic benefits for the wider economy and not just the former monopoly energy companies.
In contrast however Ofgem report that over the past decade there has been “a planned rise in the costs to suppliers for energy transportation” as the privatised network companies maintain and renew the ageing infrastructure in the UK energy market.
What Ofgem don’t do is highlight the impact of transportation costs on a customer’s energy cost, or the increase in their impact over time.
Taking the last 3 years alone, since 2011, for a relatively simple electricity metering system the cost of transmission and distribution has increased by 40% and 30% respectively.
What Ofgem do tell us is that between June 2014 and May 2015 they expect those transportation costs to rise by, on average, a further 3%.
The impact of which will mean transportation costs are responsible for an 8% increase in the average p/kWh unit rate since 2011.
Environmental and social obligations costs
Ofgem report that in the decade to the end of 2013, the cost of the various obligations rose by an astonishing ten fold over the period. But that as of December 2013 Government policy changes reduced some of these costs.
We’re not so sure, the average customer will have seen the rate of the Feed In Tariff levied on their bill remain relatively static however the Renewables Obligation has risen 121% since 2011 from 0.48p/kWh to 1.06p/kWh today and Climate Change Levy has increased by 12% from 0.485p/kWh to 0.541p/kWh.
The impact of which is that these levies are responsible for a 5% increase in the average p/kWh unit rate since 2011.
Supplier operating costs
Ofgem report that the much-maligned suppliers have not increased their operating costs over the last 10 years and thereby have kept an apparent lid on expenditure on activities like marketing, billing, metering and bad debt management.
Ofgem however expect Supplier costs to increase by 3% over the coming year, the impact of which is around a 0.2% increase in the average p/kWh unit rate since 2013.
Conclusion
Whilst it might not fit the commonly held opinion, the biggest impact on the increase in energy bills over the last three years has been the cost of upkeep of the electricity network (8%), closely followed by the government’s renewable and green energy levies (5%), with not a supplier margin in sight (0.2%).
Ofgem’s summary of the supply market definitely didn’t indicate that.