Price Warning: The British Hash

You should have seen a 10-20% increase in your electricity price

2 weeks ago Bloomberg released a statement from the BG website that was later removed. The general comments that followed were frustratingly political and sidestepped the issues surrounding energy prices.

On the one hand, the press release was no longer on the website and on the other hand the Chief Executive decided to comment by saying 'we are not immune to wholesale cost increases'. Some critics suggested this was a ploy to manage expectations ahead of an increase without being committal so customers didn't knee-jerk over to the competition.

The release itself said "why we've had to raise electricity prices - our first increase since November 2013" but it was quickly removed from the site.

It feels like a bit of a hash quite frankly and a shame that nobody seems to be stepping forward to educate the British public on increases in prices that are already 'in play'. This was an opportunity to step forward and to be a company that explains the focus needs to move from the price paid per kWh to how many kilowatts are used.

If you were a personal trainer and all foods' calorie content increased outside of your control each year you'd have to focus your clients on exercising rather than calorie counting right? This isn't too dissimilar to where we are now with the energy bill in the UK.

Your business electricity prices should be up this year by as much as 14%

If you didn't see an increase in your electricity price one of the following may explain it.

  • You purchased a few years ago with a large risk premium for a long-term deal (although it would still be unlikely not to see an increase)
  • Your broker ripped you off last year and made a huge amount of money only to be lowering it this year to flatten out the impact - they are not being your friend but creating an appalling relationship with your P&L
  • You bought badly previously at a market high point (it would probably have to of been the market high)
  • Your business is growing and you have numerous new sites such that in year 1 the rates you could achieve were higher and/or you hadn't yet achieved economies of scale from your collective volume.

None of these would be worthwhile celebrating.

You feel you beat the market this year because your price hasn't gone up? But it also bodes the question 'what the hell were we doing last year?'. They should be up by 7-14% for your business (electricity only don't confuse this with gas) so if you've flat-lined you could argue you were over-charged by the same tune last year (which has to be worse).

The broad range is a discussion for another blog and relates to where the increases are loaded but let's take a simple case to get started. If you didn't see an increase in your electricity prices this year then you didn't buy very well the year before. Sorry to be the bearer of bad news. At least you can do something about it now...

What I mean is that the wholesale price of energy we are buying we've been buying at a lower price year on year. That's right. The wholesale price has been coming down. There is also a position where if I purchased wholesale energy today for 1st October 2017 to 30th September 2019 I would achieve the following prices:

Wholesale Electricity Prices ppkWH (ppkWH = pence per kilowatt) *on a simplified basis where you use 50% of your energy in the winter and 50% in the summer equally.

  • 4.068p (for the period 1st October 2016 to 30th September 2017)
  • 4.429p (for the period 1st October 2017 to 30th September 2018)
  • 4.328p (for the period 1st October 2018 to 30th September 2019)

So the wholesale cost is falling by over 2% between 2017 and 2018.

Despite this, the statement from the Chief Executive at BG refers to wholesale prices increasing and the sentiment is around this being the reason for price changes. You'd potentially agree with him noting a 10% increase between 16/17 and 17/18 but the wholesale price of energy is only 40% of the energy bill in 16/17 so the wholesale change only accounts for a 4% change!?

So where would a large 10%+ increase come from?

The truth is that ever since we started signing up and committing to legally binding commitments to climate change we've been adding explosives to a ticking time bomb. The political attitude to this is to use a stage of taxation (controlled explosions) to gradually solve a pretty big problem. i.e. explode the bomb in a controlled a gradual way?

  • The 'ticking time bomb' is the removal of coal-fired power stations and gas-fired power stations that don't satisfy emission performance directives.

  • The 'explosives' added are the poorly planned incentive schemes for bridging the capacity gap (from taking these forms of power generation offline).

  • The controlled explosions are 'those in power' trying to create private auctions to fill capacity gaps in the short term.

The outcome of all of this is that this year a pretty big controlled explosion has occurred and nobody really seems to be talking about it. I say this because the British Gas website slip made the papers when actually we should already be expecting and planning for an increase. It can only be a matter of time.

If your business can commit to a wholesale electricity price that is gradually getting cheaper yet your bills, when they finally land, goes up you'd be pretty frustrated. Add in the new charges to the bill that are coming from these controlled explosions and that's what you have.

Taking the next 3 years again...this time looking just at the 'controlled explosives' renamed here as Carbon Taxes...

Carbon Taxes in ppKWH (ppkWH = pence per kilowatt)

  • 2.709p (for the period 1st October 2016 to 30th September 2017)
  • 3.518p (for the period 1st October 2017 to 30th September 2018)
  • 4.353p (for the period 1st October 2018 to 30th September 2019)

Source: Haven Power Third Party Costs Report Issue 6 - February 2017

The crazy thing here is that the Carbon Tax inflation isn't only huge but it also takes the Carbon tax to a point where it is larger than the wholesale price of energy for the 1st time in history in 2018/2019.

It means the total energy bill has already gone up for the next few years and it means you need to start budgeting for these increases. I'll summarise again to assist (note I'm adding in costs of transporting energy and distributing it to your business which is why you can't just add wholesale cost to carbon cost to get to the total).

Total Electricity Price (Illustrative purposes only). Prices in ppkWH Wholesale Part of the Bill (ppkWH = pence per kilowatt).

  • 9.289p (for the period 1st October 2016 to 30th September 2017)
  • 10.631p (for the period 1st October 2017 to 30th September 2018)
  • 11.493p (for the period 1st October 2018 to 30th September 2019)

So the price is going up. You need to budget for this and if you are buying well and not overpaying a broker you'll see inflation levels of something like;

  • 14% this year
  • 8.1% next year

To beat electricity price inflation?

Trading energy closer to the delivery term is a strategy but it needs to be well managed with clear trading triggers and closing points. Don't forget you'll only be dealing with 30% of your energy bill in 2018/19 so 'beat the market' with a price 20% below the indicators and you'll only knock 6% from the total bill. That's still an increase.

You'll need to look at using less energy and being less reliant on importing from the grid to truly make a difference to your bill. Clever use of your building to maximise opportunities to generate your own energy will help particularly if you utilise load shedding and demand respond to migrate your charges away from peak zones.

NewsNick Proctor