Firms ill prepared for ‘huge’ capacity costs on energy bills


moneyUK firms appear ill-prepared for the impact of capacity market costs on power bills, which could increase almost a hundred times next year.

According to calculations by SmartestEnergy, a typical large energy user could take a £1million hit next year due to the government policy.

The capacity charge is levied upon energy use on winter weekdays (November to February) between 4pm and 7pm. Businesses consuming power during those times will face a steep increases in charges as a result, warned SmartestEnergy.

The firm outlined the kind of hike users may face in a recent webinar. For example, a large energy user consuming 10GWh 100GWh per year may use 5%, or 5GWh during that winter evening peak, suggested Mark Cox, key account manager at the business energy supplier.

“This winter [given the small volume of DSR-based capacity involved in the mechanism], that would equate to a capacity market bill of about £12,000,” he said. “Next winter, 2017-18, that £12,000 will become almost £1million.”

Cox said the firm was trying to highlight the impact the capacity market would have on bills to customers and intended to levy a fixed monthly contribution throughout the year to avoid bill shock in April when actual capacity costs are calculated.

Despite those efforts, Cox said many firms could be caught cold.

“Personally I am not too sure all businesses are ready for the scale of these costs coming through on their bills. Especially if you are a large energy user, this is a huge cost, which is coming through soon,” warned Cox. “You must be making contingency in your budgets.”

A poll by the firm suggests Cox’s fears are well founded. Just 30% of respondents said they had accounted for the cost of the capacity market in next year’s budget.

SmartestEnergy’s modelling for the outturn, or price, of the next capacity auction, to be held next month, ranges from £33kW to £48kW. Head of pricing Gavin Baker said the auction was unlikely to be competitive given the volume of prequalified capacity, standing at 53GW, with the behaviour of some 1.5GW of new diesel likely to affect the final price.

Rising Fits, CFD and RO

Meanwhile, the firm warned of rises for most other non-commodity costs.

Including the cost of exempting the most energy intensive industries from rising renewables costs, SmartestEnergy predicts Renewables Obligation costs will increase around 20% to £19.63/MWh for 2017-18, which would add £30,000 to an annual 10GWh power bill, the firm calculates.

SmartestEnergy predicts small-scale FiT costs will increase around 14% in 2017-18, and rise 8% further in 2018-19.

“Both [of those estimates] are up on our previous projections as we continue to hit deployment caps each quarter despite all the subsidy cuts,” said Cox. “They don’t seen to have dampened small scale solar investment as much as perhaps we thought they might.”

Large scale subsidies via the CFD FiT will also hit bills next year and harder the year after, from £0.76/MWh today to £3.78MWh next year, £6.01MWh in 2018-19 and £9.10MWh in 2019-20, according to SmartestEnergy.

“On current projections, the FiT CFD cost is really going to come through after this year – be ready for it is our message,” said Cox.

“Even a £3 charge, which we expect to see come through next year, is about an extra £30,000 for every 10GWh of power – and by 2018/19 every 10GWh will be costing almost £60k in CFD payments alone,” he added.

“So if you submit longer term budgets, do account for the CFD charge. It isn’t significant yet, but it is going to be soon.”

Triad warning

The firm also warned I&C businesses to consider the impact of other market levers on the Triad mechanism.

While companies have become used to turning down for what they think will be the highest half hourly winter evening peak, Cox said the effect of the capacity market occurring simultaneously may mean the Triad period potentially “stretches beyond the traditional 5pm-6pm peak”.

“It is going to be interesting,” said Cox. “What we are saying is not to try and target any one half hour [to hit Triad], but try and keep that [reduction period] as wide as you possibly can.”

Amendment: This article originally contained screenshots from, and a link to, a webinar by SmartestEnergy. To protect its IP, the company has asked for these to be removed.

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