Energy costs: the bumpy ride continues

Unsurprisingly, there’s been lots of media coverage of the wholesale energy markets, with consumers keen to monitor rising costs and underlying drivers.

But perhaps surprisingly, there’s been far less focus on changes to non-commodity elements of electricity bills, despite these accounting for more than half of overall invoiced costs.

While high wholesale prices are good news for subsidies linked to market rates, such as the Contracts for Difference (CfD) levy – they have not had such a positive impact on other charges. Notably the Renewables Obligation (RO) and National Grid’s Balancing Services Use of System (BSUoS) charge.

So, let’s start with RO.

Supplier failures add £218 million to RO charges

As you may have read in previous blogs, the high number of failing suppliers – 25 since August – has created a situation where many have not paid over the RO charges they’ve collected from customers for the 2020-21 compliance period (called ‘CP19’). This has created a shortfall that’s run into many millions.

But until figures were released earlier this week, the industry wasn’t aware of exactly how high that amount was. We now know it’s a whopping £218 million.

Thanks to a process of ‘mutualisation’, this shortfall will now be shared out among the still-solvent suppliers.

To provide some context, this averages out at around £0.8/MWh for the 2020-21 period. Depending on your contract type, this may result in some additional charges being passed through.

In addition, suppliers have already gone bust without paying £87 million of RO for the current compliance period (Apr 21–Mar 22). This is in addition to Bulb’s £145 million RO bill, which we expect to get paid – but which is far from certain.

As a direct result of our lobbying the Department of Business, Energy & Industrial Strategy (BEIS), a consultation is now open to look at forcing suppliers to pay their RO bill quarterly rather than every year.

This will reduce the amount of unpaid RO which, along with a huge reduction in the number of suppliers now at risk, should prevent a repeat of this in future.

Balancing charges skyrocket

No business wants additional charges they didn’t budget for. But compared to National Grid’s fees for balancing the grid, RO is sadly small fry.

November has seen the highest-ever month of balancing market costs, with an average rate of over £12/MWh.

The second highest-ever rate was £8/MWh – and that was for October. Even at the height of the Covid-19 crisis last year, the most we reached was around the £6.30 mark (and the average for the first nine months of 2021 was £4.80/MWh).

To say this is unchartered territory is an understatement. But why is National Grid having to pay such colossal sums to balance our electricity system?

Once again, high wholesale prices are the main driver.

Generators can either produce energy to sell to the wholesale market or generate to participate in balancing services – but not both. So, the fee National Grid has to pay for balancing services has to be high enough to incentivise participation. In the current market, this is eye-wateringly high.

Wind status impacts prices too

There are other drivers too – and these are due in the main to our increasing reliance on wind generation.

Firstly, National Grid has an ongoing number of transmission asset outages – pylons, cables, wires etc. Normally, the majority of repairs and maintenance, as well as connecting new wind farms to the grid, should be completed by the winter season. But not this year – and this creates problems when it’s windy, as there is simply not the capacity currently to transmit all the wind generation around the grid – and in particular from Scotland to England.

This means wind generators have to be paid not to generate. And reserve thermal generators, at other locations more conducive to balancing the grid, have to be paid to generate.

Likewise, reserve generators have to be paid to generate when it’s not windy. And at today’s prices, this isn’t cheap. So, the upshot is BSUoS fees are rocketing…

Lobbying for more certainty

BSUoS is determined half hour by half hour and only set retrospectively month by month. So as a supplier, we are not able to provide customers with any future certainty over these costs.

This is a problem we’ve been flagging for almost a decade now. Finally, after a long period of lobbying, a modification has been proposed to have BSUoS costs recovered as a single fixed charge – set for a three month rolling period with 12 months’ notice given of any change in charge rates.

We are hoping Ofgem will make a decision on this by April 2022, with new charging methodology potentially introduced by April 2023. So, watch this space.

For now, we appreciate these volatile costs for BSUoS and RO – especially on top of volatile wholesale commodity prices – really are not good news for consumers.

For more information and support, please contact your Client Lead or Account Manager (existing customers). Or drop our team an email via info@npowerbusinesssolutions.com.