With rising concerns over potential blackouts, the government has introduced new measures to ensure a reliable UK electricity supply whilst reducing carbon emissions at a cost efficient level for customers. New legislation is called Electricity Market Reform (EMR) and includes incentive schemes to generate low carbon and reliable electricity supplies.
Essentially, this means replacing older power stations with low carbon generation e.g. wind, and the cost of this will be recovered by new taxes on electricity, which have been introduced by the legislation.
These taxes will cover all customers, including domestic and business and will need to be recovered through the cost of energy, however different suppliers are already proving to have different policies for onward charging so how will you know what is a good deal or not?
Business Juice will show the breakdown of these taxes and ensure all customers are given a full transparent view of the costs they can be expected to incur. We will underline whether the price is inclusive of EMR costs or indeed whether they are fixed, pass-through (charged at cost) or even absorbed (no additional charge).
Clearly we hope it will always be the latter and that this latest government initiative won’t lead to an inexorable rise in energy costs but that looks unlikely.
Two new mechanisms will be introduced:
Feed-in Tariffs with Contracts for Difference (CfD)
These guarantee a fixed unit price for generators of low-carbon electricity, providing the certainty that investors need to back new projects.
CfD’s do exactly what they say on the tin; they are a contract that guarantees a payment for any ‘difference’ experienced.
So, if the price of electricity is too low to support more costly generation through renewable sources, a payment for the ‘difference’ will be made to the eligible renewable generators, to compensate them for the lower electricity price.
These CfD costs will be charged to all suppliers and these costs will then be recovered from customers directly through their electricity invoice. The UK public will essentially be charged a higher rate for electricity to ensure a cleaner and more reliable energy supply.
We have already seen some suppliers including an allowance in their costs for CfDs even though they have yet to actually impact on costs. Other suppliers have said they will absorb these costs “for now” whilst still more have promised to “keep a watching brief“ and update their pricing policy accordingly in the months to come,
A capacity market
The capacity market has been set up to ensure that generation supply is available when it is needed the most.
It aims to provide security of electricity supply by ensuring sufficient reliable and flexible generation capacity is always available which has been borne out of the desire for increased renewable generation that suffers from intermittency e.g. the wind not blowing the turbine or the British sunshine not driving solar generation.
The capacity market provides incentives for developers and owners of generation plant to make their capacity available. These capacity providers are paid on a kWh per year basis for the capacity that they can make available. This then provides a steady, predictable revenue stream on which they can base their investments.
In return for this revenue (capacity payments) they must deliver energy when needed to keep the lights on, or face penalties.
This capacity is needed to meet peak demand periods when renewable technology isn’t operating.
Again, it’s the suppliers that are obligated to make payments in the form of a capacity market supplier charge to allow the capacity providers to meet their liabilities and these costs will be passed on to the customer.
Suppliers will therefore need to include these taxes in their electricity prices and it is yet unclear how they will do this. We have already seen some suppliers commit to absorbing these costs whilst others have moved to put up their prices.
What this means for business energy customers is a whole new level of missing transparency. No longer can prices be simply ‘compared’ as different commercial policies will drive what is inclusive, fixed, variable or exclusive in any quoted price. These even differ amongst a supplier’s products let alone between different suppliers.
As a result Business Juice commit to providing a full breakdown of these taxes in order to ensure all our customers are given a full transparent view of the costs they can be expected to incur, how these will be levied and the level of risk inherent in any supplier’s commercial policy.
The business energy market just got a whole lot more confusing, thank heavens for Business Juice.