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Turbulent year for electricity leads to rising third-party costs

Image: Getty.

2020 was a remarkable year for electricity demand. The COVID-19 pandemic and multiple lockdowns caused unprecedented changes to energy usage across the UK. In fact, the first lockdown saw national electricity demand drop by 15% - the largest drop the country’s ever seen. As a result, renewable energy overtook fossil fuels as the nation’s primary source of electricity for the first time. With supply of coal, oil and gas down to below 37.5% of Britain’s consumption, the electricity grid of the future is beginning to take shape.

The pandemic also led to a worldwide drop in commodity prices. Suppressed national demand and low commodity prices caused power prices to drop to their lowest in over a decade: £36 MW/h.

We’ve since seen some recovery in demand across the UK, due to two primary factors. Essential businesses remaining open during second and third lockdown caused demand to begin increasing. In addition, the coldest winter recorded in a decade drove high-level electricity demand across the UK. Globally, vaccine developments have seen prices rebound beyond their pre-pandemic levels.

All these changes will have a significant impact on businesses’ electricity bills. This is because third-party costs (TPCs) are set to rise slightly. Also known as non-energy costs and non-commodity costs, TPCs make up about 60% of the total charge on energy bills. Businesses should be savvy to these changes, and what they could mean for their electricity bills. Here’s what they need to look out for.

What changes to TPCs mean to businesses

Demand reductions from the COVID-19 pandemic have impacted many TPCs represented on businesses’ electricity bills. This, in combination with the increase in intermittent renewable generation necessary to meet net zero goals, has caused some of them to increase.

For example, the predicted continued trend towards demand reduction throughout 2021 has caused the Renewables Obligation (RO) cost to rise by 2.5% for the 2021/22 year. Suppliers have continued to exit the market since September 2020, which will likely trigger mutualisation for a fourth consecutive year, another driver of price increases.

The Balancing Service Use of System (BSUoS) cost is also subject to increase based on two primary factors. A massive uptick in renewable energy generation has made it more difficult to balance the grid – primarily due to the prevalence of wind generation in the UK. Going forward, wind generation is expected to continue to increase and drive associated costs upwards. The second primary factor affecting this price increase is the national decrease in demand for electricity. Together, these two factors have caused balancing issues that have increased the cost outturn by £400 million from the figure originally forecast by National Grid.

Non-pandemic-related changes

In addition to the TPCs impacted by the pandemic, there are a few other changes businesses should be aware of. From April 2021, Ofgem’s DCP268 will catalyse revised tariff structures that will significantly impact some TPCs. For example, we expect the Distribution Use of System (DUoS) charge will increase continually over the next few years due to changes in charging methodology.

Non-half-hourly customers will now be charged using the RAG (Red/Amber/Green) system, which aligns half-hourly and non-half-hourly charging rates. As of the 2021/22 charging year, intermittent and non-intermittent generators are also aligned via the RAG system, which will decrease the existing tariff bands from 33 to 16.

In the 2022/23 charging year, still more factors will contribute to the increase in tariffs on the DUoS charge, including an under-collection of revenue in the 2020/21 year due to COVID-19. Revised adjustments to base revenue as directed by Ofgem, and underlying increases in base revenue due to the introduction of RIIO-2 in 2023/24, will also impact the increase in tariffs.

Rising tariffs and increased chargeable revenue have also driven the cost of the Transmission Network Use of System (TNUoS) charge upwards. Additionally, the Targeted Charging Review will significantly change the charging methodology used in recovering the residual element of the TNUos charge.

Understand your business’s needs

Considering these changes, it’s crucial for businesses to have a good understanding of their energy consumption habits to strategically budget both finances and electricity use.

Part of developing this understanding is knowing how each type of electricity contract will charge for TPCs. Customers on pass-through contracts may have some or all of these costs charged directly. Customers on fixed contracts should look closely to see which of these charges are fixed; some may not be.

The energy industry is in full swing to lessen the impact caused by the COVID-19 pandemic. But even when the ripple effect of the pandemic fades, the way that business electricity is used and charged will constantly evolve.

Contributer

Rob Milloy Director of sales at the Drax Group.

Rob Milloy is director of sales at the Drax Group.

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