What am I actually paying for?

By 01 March 2017May 25th, 2017Our News

There is more to the cost of energy than meets the eye. More and more businesses are starting to question why their energy bill is going up when the markets indicate that prices are falling.

THE ELEPHANT IN THE ROOM – Which way are energy prices actually going?

As the graph above highlights, wholesale energy prices for 2016/17 are the lowest for a decade.

You the customer, however, are paying more and here we will be explaining why.

So energy prices have fallen – why haven’t my bills?

The reason is helpfully illustrated by the same graph. The red area is the wholesale energy itself, so the cost of the raw commodity which is impacted by global markets, seasons, demand and supply. It is also what we as energy brokers can strategically purchase.

Everything else on the graph would be considered ‘non-commodity’ – this means government/regulatory and transportation costs. It is also something that we as energy consultants and even the suppliers themselves have very little control over.

You would be correct in saying that by 2018 it will cost less to generate your energy than it does to transport and regulate it.

The government has introduced numerous new costs to try and balance the delivery system for energy, which in the UK is quite old. The funds generated are also used to incentivise further investment into renewables to make the industry cleaner and more sustainable by offering subsidies and financial support to generators.

What can you the energy consultant actually do to mitigate this to the end user?

Understanding your supplier’s attitude towards risk is important.

Non-commodity costs are issued annually and remain an unknown quantity to all suppliers because the government continues to adjust them.

So if a director sees his renewal and thinks: “That’s a big increase and it’s getting worse, better lock out.” Remember that he is effectively asking his supplier to forecast and guarantee these unknown quantities which invites a risk premium.

So how expensive is this risk premium?

I have seen non-commodity costs over-forecasted by 486 per cent and I have also seen suppliers under-forecast them and lose millions of pounds. No supplier wants to be in the latter position and 99.9 per cent of the time, suppliers more than cover themselves either through risk premiums or just passing through costs.

So now you as the consumer in 2016/17 want to lock out your commodity costs while it is low but may have to swallow a load of risk premium for the pleasure.

And that is why your supplier’s attitude to risk becomes important to understand.

Here is an example:

Supplier A (The risk adverse) £500,000 total cost:

Does not fix any of the non-commodity charges and looks quite cheap.

Supplier B (The risk taker) £560,000 total cost:

Is happy to put a number to these same charges and fix them to provide you certainty of cost … subsequently they look more expensive.

With this you also run the risk of comparing apples with oranges and signing a contract you think is cheaper, but excludes certain costs which was the more common issue associated with non-commodity charges.

Whether for transparency or cost, it is really important that you as a buyer have enough of an understanding of the energy price on the table, so that you can identify whether it is inclusive and fixed, or not. Particularly if you plan to commit to a supplier for a significant length of time, it really can make a huge difference.

This is where professional help from an energy consultant such as ourselves becomes not just relevant, but invaluable and not just to help you understand a supplier’s offer and its limitations. Here at Utility Team, we work with all parties to shape supplier terms and conditions for both fixed and flexible contracts to address those limitations and concerns. A short hand example would be: “Should the supplier over forecast on non-commodity elements A, B and C, the client will get a rebate for 100 per cent of the difference between this prevailing cost and what was originally agreed. In so doing the client does not incur any liability attached to increases in the costs.”

It might be that you as a business do not consume enough energy for this to be on your radar, but if you are in a multi-million pound bill bracket and are dealing with a portfolio, you would be well-advised to be aware of the difference that non-commodity costs can make to your energy bill.

If you would like more information, or wish to discuss how we can help you, email me at James.Rant@UtilityTeam.co.uk