This is a question we get asked a lot. The media like to latch onto this issue as a great opportunity for a negative news story, and their presumption is always yes. In reality however the answer is more complicated.
Business and domestic users electricity users can gain better control of their energy costs and the first stage is to understand exactly what you’re paying for.
What costs does your electricity bill consist of?
Electricity costs broadly consist of 3 main elements:
- Network/Transmission costs: The costs of getting the power to you – these are called X1 Network Costs and account for roughly 40% of your bill.
- Government Taxes and Levies: The government runs various schemes that collect a % of your electricity bill – these are called X2 Network Costs and account for roughly 15% of your bill.
- Commodity Costs: Although in its physical form we only see electricity as lightning, electricity is a traded commodity with a wholesale price – these are called Y Costs and account for roughly 45% of your bill.
This means that the formula for working out your total energy costs is as follows:
So to understand if electricity prices are going to increase over the next 5 years we must understand what is likely to happen in respect of these 3 main electricity costs. Let’s look at each one in turn.
X1 Network Costs
In the UK there are about 15 different network areas, and each network is and owned by a private company. As private companies the Networks need to increase their profitability and the returns they deliver to their shareholders, so it follows that X1 Network Costs will go up consistently over time.
Network costs are heavily regulated by OFGEM however so networks have to follow a stringent process when putting forward a case for increasing prices. Approvals are not automatically granted so there is some consumer protection in play here that should prevent drastic price increases. Recently some Networks have actually lowered their costs..
Large energy users can significantly lower their X1 Network costs themselves by learning and applying demand management techniques. If implemented well these can lower energy costs by up to 50%.
Y Wholesale Electricity Costs
Wholesale electricity prices actually go down almost as much as they go up! It might surprise you to know that wholesale electricity costs have set record lows this month (July 2014) and with the world developing cheaper ways of making electricity such as shale gas for example, wholesale prices have just as much chance of falling as they do rising. Industrial and commercial electricity users that take a flexible purchasing approach to Y Costs can actually take advantage of price changes to make significant cost savings.
X2 Government Levies and Taxes
Unfortunately these costs will emphatically go up despite what you hear in the press about government plans to freeze energy prices. The Energy Act 2013 was recently passed with cross-party support which allows successive governments to charge significantly more taxes and introduce new taxation schemes via the electricity bill. General estimates forecast that these charges alone will result in 10% price increases each year.
Why are Government Levies and Taxes on Energy Increasing?
In the UK we need to raise funds to invest in renewable energy generation technology. We have signed up to EU Treaties that bind us to burning less coal and brown fuels, so we need to develop more wind, hydro, nuclear and solar energy technologies.
Developing new generation methods require huge capital outlays, hence the need to raise funds through levies on traditional energy sources.
With the media full of claims from politicians that that will freeze or reduce energy prices, many people not working in the energy industry are surprised when they find out that their policies are actually increasing prices, and will continue to do so for the foreseeable future!
So…will your electricity costs increase over the next 5 years?
Headline electricity prices will most likely go up over time because of increasing taxation policies to promote greener and newer generation technology. However, if you begin using demand management and flexible energy procurement strategies to curb X1 and Y costs there is every change that you can actually reduce your costs over the next 5 years.
If you would like to talk to an expert about your energy procurement strategy please get in touch!