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Energy cost outlook – Growing uncertainty sees energy price rises looming

Forecasting energy bills and what additional costs they may include is becoming increasingly difficult for UK businesses.

We face a broad range of both legislative and geo-political influences that could significantly impact on energy price. There are a number of factors on the horizon that will almost certainly result in increased costs, but when they will be applied and the impact they will have in reality is unclear.

Brexit is, of course, the biggest elephant in the room, potentially threatening disruption and uncertainty, given we are still not really much clearer on what it will look like. The energy sector is no different, particularly bearing in mind our continued reliance on gas turbines to meet baseload demands and cope with demand spikes, such as during winter peaks.

A substantial portion of the UK’s gas and much of our electricity is supplied via European interconnectors, though we do also buy some gas from international sources in the form of Liquified Natural Gas (LNG), which arrives by ship.

The Department of Business, Energy and Industrial Strategy (BEIS) and Ofgem say they are optimistic that flows will continue, even after a no-deal Brexit. However, nothing is certain and any issues with security of supply could occur just as we are moving into winter when our demands on these supplies are greatest.

With a near moratorium on fracking and dwindling investment in the North Sea, the UK is ill-equipped to rapidly address any unanticipated slump in gas imports. BEIS projections show that demand for gas in the UK is falling and will continue to decline by a further 25% by 2025. However, despite a predicted slump in prices next year, figures from Statista suggest year-on-year price increases after that.

While oil prices are currently low on the back of tumbling demand and bloated inventories, geo-political upheaval, such as the recent attacks on oil tankers in the Gulf of Oman, leave the commodity as unpredictable as ever.

Closer to home, a number of upcoming pieces of new legislation and developments within the UK energy industry look set to generate further uncertainty. Ofgem is currently undertaking a Targeted Charging Review (TCR) of residual network charges, with the results expected in late August or early September.

Businesses, which currently avoid residual or triad charges by reducing consumption at peak times or using behind-the-meter generation, are expected to incur additional costs as a result of the changes. There will also be a further reduction in embedded benefits for grid-connected renewable generators.

We will shortly also see Ofgem’s first open paper on a Significant Code Review (SCR) covering future changes to other network costs, which will lead to a consultation in early 2020. These developments will result in fundamental changes to DUoS charges. Implementation of both the TCR and SCR changes are expected on 1st April 2023.

Also, the UK has set very lofty carbon reduction goals, with net zero carbon emissions by 2050 and a proposed ban on new petrol and diesel cars by 2040 or sooner.  But it is still unclear what the pathway to get there is and what costs this could involve (for example, grid-scale battery storage, EV charging infrastructure and new capacity) and how those would be passed on to bill payers.

A government White Paper on energy was originally expected this month, which might have set out a roadmap for achieving these targets. However, the current political instability means that the White Paper will be delayed at best, and possibly abandoned.

All of this makes formulating a cost-effective energy strategy an ever more difficult moving target currently.

This is where an experienced, full-service energy consultancy comes in, ensuring that you purchase only what you need, at the right price. Further, it also ensures that the energy you do pay for is being used as efficiently as possible.