Martyn Young, co-founder and Procurement Director of ZTP, the strategic energy software and management consultancy, outlines some interesting changes in the energy market – and their impact on businesses
The past 12 months has proved a challenging time for energy managers in controlling budgets with the market cost of Summer 2019 Power peaking in September 2018 at £63.2 / MWh, up 47% from 1 April 2018, and by gate close on 28 March 2019 it had fallen 31% from its peak. There were many different factors driving this, and we saw the correlations with other commodities change during this period. The UK Gas market price is now more influenced by the drop in the cost of Asian LNG, down 53% from its highs in September 2018, than longer term contract linkages with oil which only fell 16.6% over the same period but has been rising again since 25 December, as the structure of energy generation changes with decarbonisation volatility increases and commodity linkages change.
On the non-energy side of costs we are now within two years of the RIIO-2 changes to Electricity and Gas transmission and Gas distribution charges, which will take place on 1 April 2021, with the results of the consultation still unknown. Electric Distribution changes follow on from 1 April 2023, and then we are into a five-year cycle, rather than the eight of RIIO-1, reflecting the fast pace of innovation that the networks are having to adapt to.
This uncertainty in costs is now within the duration of a two-year fixed contract and it is expected that suppliers will widely use T&C clauses to vary prices on fixed contracts where they see higher costs coming through. This has already been seen in the Small and Medium-Sized Enterprise (SME) sector with a Big Six supplier changing its T&Cs to allow costs to be passed on.
The new charging structure will have a concept of fairness to energy customers, which is already being seen through the restructuring of the Triad charge to remove distortions caused by Triad avoidance measures in paying for electricity transmission. The restructuring of this may have significant rebalancing of meter costs on their use of grid capacity. Another sign of things to come is the approval by OFGEM this month to bring the distribution charging of smaller meters into line with half hourly meters, DCP268, which may point to the future demise of the single rate tariff.
In addition to the costs of producing and distributing energy, it will also be necessary to be able to rapidly adjust to the prospect of increased State interventions to drive decarbonisation, which is gaining increased political attention with recent populist movements.
With so much change happening in the structure of energy pricing, innovations such as ZTP’s Kiveev, which has been developed to provide a deeper understanding of the wholesale energy market risk coupled with the ability to forecast the impact of changes to the non-energy components of the cost from meter level upwards, help energy managers to save time whilst keeping on top of energy budgeting.
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