Energy Strategy Focus is a series of articles and other content that we produce to help you with your energy strategy with particular attention to energy procurement. The aim here is to let you know how changes in the industry and market are likely to affect you and your business. In this instalment, we focus on the growing impact of non-commodity costs.
Energy-Smarts has helped many clients to be protected from the worst of the impact of rocketing energy commodity prices we have all seen as a direct result of the Ukrainian conflict.
However, we also know that there is less welcome news to deliver as we explain some of the changes in the market. But we think it is important to ensure that you are appropriately briefed and can then plan accordingly.
The past few years had seen non-commodity levies and taxes become a steadily increasing proportion of overall energy costs. The last six months, as commodity prices have soared, have seen that position change. However, non-commodity costs are rising and are forecast to continue to be volatile and increase over the next few years. Especially, those that are linked to the commodity cost are rising dramatically, with consumers already starting to feel a significant impact.
There is also frustration about the timing of non-commodity news. Not only are many non-commodity prices only released close to price setting / contracting points, but it is also difficult for industry forecasters to predict costs and their impact given the current commodity price volatility.
We wanted to explain where we see the biggest impact falling.
Transmission & Distribution Losses – Electricity
The most marked increases relate to charges for transmission and distribution losses. These charges change depending upon where you are in the country and the voltage of your supply but in general, they amount to approximately 10% of the market commodity price.
Therefore, in the previous “normal” market the losses cost equated to c.£5 / MWh when the commodity price was £50 / MWh. By contrast, today in the new world if the price is £400, then the 10% is £40 / MWh. So potentially the losses charge is similar to what the commodity charge used to be.
A further, and often significant variable though is when the contract/losses were priced. All consumers will experience a significant increase, the variable is the timing of when the increase will apply. The mechanism within contracts will apply it at different times.
Unfortunately, organisations that are contracting now, regardless of contract type, will feel the impact. Some clients have some further protection, but suppliers still have the contractual ability to vary, or recover any additional non-commodity costs
Shape (Contract Cost) Electricity
Further unwelcome news comes in the form of “Shape.” This accounts for the difference between baseload, the electricity you can buy, and consumption that falls outside of these baseload periods. Most of the volume is in the baseload period. However, Shape charges have been particularly badly hit by the market turmoil, especially more recently, and have increased proportionally more than baseload costs.
Shape charges used to make up about 3-4% of the total delivered price, with the Shape price having a link to commodity price it means that the shape charges have increased by a number of multiples, to the extent that this cost can again, nearly be the same as an old-world commodity price.
The same timing of impact and contract considerations apply to the shape as they do for losses.
Under these current market conditions, suppliers, as a maximum, will only fix shape charges for 12 months.
UIG (unidentified gas) (Non-Commodity Charge)
These are the regulated charges covering the cost of losses within the gas network. The increases will be charged at the next rate-setting point regardless of contract type. In October 2021, the new charging regime coupled with the commodity cost increase saw an increase of 2000%.
We are just starting to see the impact from October 2022 and on the initial data we have so far, the increase is averaging 380%, but with an extensive range around this number. The charge is very meter specific but can make up 10% – 20% of a contract’s total delivered costs.
Unfortunately, the unprecedented market turbulence has defeated forecasters from the leading central banks and major corporations alike. The probability will be that any organisation will have underestimated the impact of rising non-commodity charges in a comparable way to having “under-cooked” their commodity price. However, now is no time to bury bad news. Many organisations will feel an immediate impact whilst others may be protected until next year. However, it will be important not only to quantify the impact but also include the “new normal” into budgeting for subsequent years.
Without wishing to state the obvious, now is also the time to look even harder and consumption reduction opportunities and one good place to start would be by completing our Energy Efficiency Awareness Survey and then get in touch us directly.