Despite the much-heralded recent drop in spot prices all is not quite as simple as Ofgem would have you believe. That is according to Energy UK, the trade body for the major energy suppliers including the Big 6, the target of Ofgem’s ire.
Energy UK have stymied Ofgem’s offensive by countering their claims of failing to ‘pass through’ falling prices to customers through the following statement:
“Wholesale energy is just one of a number of costs outside of an energy company’s control, which make up a household bill.”
“All energy suppliers aim to hold costs as low as possible for as long as possible.”
“They buy gas and electricity months and even years in advance to smooth out the swings in the market. When wholesale prices fall it can take time for bills to catch up as the gas and power may have been bought at a higher price some time ago.”
“The suppliers also have to take all manner of risks and wider costs into account, including political and regulatory issues.”
In a heavy reference to the upcoming Competition and Markets Authority investigation, Energy UK added:
“The industry is committed to openness and will be answering the questions on wholesale prices to their customers and to the authorities.”
“The industry believes an honest conversation is needed about the way both gas and electricity prices are impacted by changes in the wholesale market.”
Ofgem had claimed that:
“In early June 2014, gas prices for next day delivery reached their lowest level since September 2010 and are now around 38% below this time last year.”
“The trend has been similar in electricity, with prices reaching their lowest level since April 2010 at the beginning of June. They are currently around 23% lower than this time last year.”
And that the Big 6 suppliers had conspicuously failed to pass through these reduced costs to customers according to Ofgem.
Amidst the accusation and denial routine between the regulator and suppliers, there is however a very real risk of an inherent lack of competitiveness driven by the current state of the energy market.
Whilst Centrica, the owners of British Gas Business, would have you believe this risk was borne solely by the Big 6 energy suppliers, the reality is somewhat different.
Centrica’s ‘confidence’ of owning the content and direction of the ‘debate’ is underlined by their sponsoring of an event at Portcullis House recently asking, in their words, the “BIG question” of:
“Who benefits from the break-up of the Big 6?”
Against this backdrop, Centrica are asking in their roundtable event on UK energy policy:
- Would a break-up of the Big 6 mean job losses and unemployment?
- What’s the best way to secure lower prices and generate new skills [If the Big 6 no longer exist]?
- Can the UK deliver new capacity and innovation [Without the Big 6]?
But despite the protestations of Centrica to the contrary, the real debate is centred on a different set of large businesses.
That debate is that some of the UKs largest manufacturers in 2014 have needed to close down operations at times of peak energy demand due to the cost of energy being too high to be economic for them to continue operating.
Tata Steel reported that when they erroneously operated during a peak half-hour earlier this year, they were exposed to an additional energy cost of a cool £1m. To counter this volatility Tata began shutting down plant during peak energy periods between 4 and 7pm each working day.
These specific actions and impacts were felt across winter 2013/14, which although a mild one, drove phenomenal pressure on intensive energy users to micro manage their energy demand in order to prevent them being saddled with huge costs, rendering their business and products uncompetitive.
The methodology employed for charging for access to the energy transmission network in the UK, the energy network that carries electricity from generation plant to local substations, is based on the concept of ‘Triad’ management.
This methodology selects the three heaviest demand half-hours between November and February and for the largest 100,000 energy users, their relative demand in this period is used to determine their overall cost.
The quid pro quo is supposed to be that the annual transmission charge for such businesses is charged at a reduced rate.
The problem is however that energy intensive businesses have no way of ‘managing’ their demand in these triad periods in order to temper their costs as they are only notified of the specific half-hours retrospectively.
As a result they are unable to ‘turn down’ the taps ahead of the key half hours and instead if they are to ‘manage’ their exposure, they need to undertake blanket action, in other words, close down their plant for the entire peak period over winter.
Hardly a catalyst for efficiency, competitiveness and future profitability.
Whilst this is not the fault of the energy suppliers, as they merely use, rather than control the transmission network, it does place the concerns of break-up and redundancy amongst the 6 Big energy companies into stark contrast against the 100,000 businesses directly affected by Triad and the millions of SMEs exposed to high and volatile business energy prices.
Tony Pedder, the Sheffield Forgemasters Chairman highlighted the burden by declaring:
“It costs us £27 to boil the kettle [during a triad]. We end up telling our workers to sit in the mess room together to keep warm because we can’t afford to keep going.
“It is a crazy system and it is getting worse. The government talks of keeping the lights on but they are already going out for heavy users.”
Ofgem chimed in with the helpful approach of ignorance to the problem by saying:
“We do not have any evidence to suggest that large users are switching off more than necessary.
“Transmission charges to large industrial users are based on their energy consumption during the triads which capture the periods of peak demand.
“This provides incentives for users to avoid consumption at these times and in doing so avoids the need for additional transmission investment [in capacity].”
This last comment is amongst the more surprising to come from Ofgem, the energy regulator. Being happy to avoid the need for investment in an energy transportation network that is holding back the competitiveness of UK industry is questionable at best.
Indeed research company, the Edison Group, has found that one in four UK midsized companies are planning for power shortages over the next few winters.
The capacity margin has contracted to such an extent that it is now below the 20% needed to prevent blackouts in periods of peak demand. As a result, in winter, under peak demand conditions and in the event of an unexpected spike, there is a risk that the capacity margin will disappear altogether.
Meanwhile despite their desire NOT to invest, Ofgem underlined the reality of the limited spare capacity in the network by saying:
“We recognise that some customers may not be able to relocate [to areas with less capacity constraints] and we have encouraged networks to engage with stakeholders to find more innovative ways of enabling connections in constrained parts of the network”
Again, focussing on demand, rather than supply side measures, National Grid, the owners of the network have announced new measures to pay larger businesses to switch off their demand for power from the grid in peak hours in return for direct payments. Whilst ‘interruptible’ contracts have long been a feature in the energy market the backdrop of these revised measures is the very real fear of demand exceeding supply with no reserve margin available leading to severe black outs.
The new measures involve National Grid paying each of the businesses involved £10,000 for each MW they commit to be ‘potentially’ reduced, regardless of whether National Grid actually requires them to do so, in a sense National Grid are paying large businesses to be a ‘negative’ reserve of power. The businesses will then be able to bid to National Grid to win the right to pay for their energy use to be curtailed. These bids are expected to be between £250-£15,000 per MWH. National Grid then will match up the most competitive bids against the required demand reduction in order to select the chosen winning bidders to switch off demand.
With nearly a fifth of the existing generation capacity scheduled to be taken off line in the next decade, and no clear new build programme, arguments over subsidy, the questionable viability of wind power, the safety and cost of nuclear power and the environmental impact of fracking, there is no immediate sign of new supply coming on tap to balance demand.
Instead all actions are being heavily focused on demand side response, placing increasing levels of pressure on our most energy intensive industries, rendering them uncompetitive and inoperable and in some cases causing them to move out of the UK to deliver greater certainty of operation and lower operating costs.
The questions then that Centrica’s round table should be focussing on is:
- What would be the impact of a failure of supply capacity margin mean for mass job losses and unemployment?
- How will the UK deliver new and replace existing capacity to keep the lights on?
And
- When will the regulator, network operators, generators, government and suppliers finally work together to deliver a 21st century energy network that UK businesses deserve