Lockdown was in full swing when we last updated you in May. Many businesses closed their doors and demand for energy from consumers and industry was at its lowest point for decades. As a result, network costs - what we pay to keep energy moving up and down the country - have gone up, along with two central policy costs. Meanwhile, recovering demand for energy is pushing wholesale energy costs back up too. In this post, we’ll look at how and why these costs are changing.
Network and policy costs rise as a result of lockdown changes in energy use
Network and policy costs make up around 42% of an average dual fuel bill. Since our last update in May, these costs have increased by 5%. This is driven by an increase in three separate costs, which make it more expensive to supply energy.
Contracts for Difference (CfD)
Contracts for Difference (CfD) is a government subsidy paid to green generators. It’s there to support low-carbon electricity generation by making sure that these generators never need to sell their energy at a loss.
During lockdown, national demand for energy was at an all time low. Renewable generators continued to make energy, but the grid had no way to store the surplus power. Through CfD, these generators were paid the difference between the cost of generating electricity (which remained stable) and its market value (which was extremely low due to demand). Some of this cost has been passed onto suppliers. Fortunately, the Government has stepped in to defer any further CfD cost increases until 2021.
Feed-in Tariff (FIT)
The Feed-in Tariff scheme means microgenerators of solar and wind power get paid for the energy they export to the grid. This cost is split between suppliers based on market share, measured by the total amount of energy consumed by their customers.
April-June this year was very sunny, so every microgenerator with solar panels has been busy making energy and exporting it to the grid. At the same time, demand fell sharply due to the lockdown, so the total amount of energy consumed by each supplier’s customers was much lower than normal. The FIT cost for suppliers has gone up as a result.
Balancing Services Use of System (BSUoS)
High renewable energy generation combined with the drop in demand from industry during lockdown presented new challenges for the grid. There are measures in place to stop the energy network from becoming overwhelmed with surplus energy, including switching off power plants, which costs money. The cost for keeping the grid balanced is passed on to suppliers like us through Balancing Services Use of System charges.
In May, National Grid estimated that these costs would reach £500 million over this summer. Suppliers are already seeing some of the impact through increased BSUoS charges. Ofgem, our regulator, recognises the issue and plans to cap the increase suppliers are facing.
The increase in network and policy costs reflects an extraordinary period for the energy industry. The pandemic has challenged the way our national energy system operates. They also make clear that without increased investment in energy storage (batteries) and more flexible tariffs, it’s going to be hard for the grid to manage surplus renewable energy as more of it is produced. We need to get that sorted if we’re to achieve the UK’s net zero carbon emissions by 2050.
Wholesale costs up as demand recovers
Coronavirus has had repercussions on wholesale energy costs too, particularly as we emerge from widespread lockdowns. These costs are now 12% higher than they were in May.
Why have wholesale costs increased?
Wholesale prices have risen in response to a recovery in energy demand following lockdown
Recent high levels of storage and low prices for gas has meant fewer gas exports from the USA to Europe, pushing wholesale gas costs up
Higher carbon market prices are driving increased wholesale electricity costs
Wholesale gas costs are now 8% higher than our last update in May.
With wholesale gas prices hitting multi-year lows during lockdown, there was only one direction for them to go as the economy reopened. We’ve seen gas prices begin to rebound in line with an increase in demand from homes and businesses.
In May, we reported that wholesale gas prices were likely to remain volatile as the US oil industry experienced some high-profile bankruptcies, including shale pioneer Chesapeake last month. A combination of higher gas prices in America and low prices in Europe has meant fewer Liquified Natural Gas (LNG) exports to meet rising demand in Europe.
That said, European gas storage levels are expected to reach maximum capacity in August, which is very early in the year. This could mean we’ll see low 'spot' (short-term) prices for gas in August and September.
Wholesale electricity costs are now 16% higher than our last update in May. Again, this has been driven by rising demand since lockdown lifted.
The cost of carbon credits are around 37% higher than they were May, which pushes the cost of electricity up. Large carbon emitters (like fossil-fuel power stations) are required to purchase carbon credits via the EU Emissions Trading System. At the end of May, credits cost around ~€21 per tonne. In July, they increased to over €30 per tonne earlier in the month, and are currently around €26 per tonne.
This is partly driven by a recovery in demand, and partly thanks to companies buying credits in anticipation of prices getting higher still. As governments pass legislation to encourage green energy growth, carbon prices are likely to rise further.
Why do wholesale prices affect Bulb?
We always supply 100% renewable electricity and 100% carbon neutral gas. However, the market price of energy affects renewable generators, too. They’ll sell to whoever is prepared to pay for their energy, and rightly so. This means that when fossil fuel prices change, renewable prices do, too.
How does this affect your bill?
We're analysing higher network and wholesale costs and looking at what this means for our overall costs this winter. We're not changing our prices now but will continue to keep a close eye on how costs change.
Reach us at firstname.lastname@example.org or drop in on the Bulb community.