Rising Energy Prices

Rising energy prices: Why is my bill so high?

We may be suffering déjà vu here.  Once again the headlines are full of rising energy prices as suppliers across the industry announce hikes for 2018, leaving businesses and consumers to pick up the pieces.

As a company that monitors the price of energy on a daily basis, we can predict the long-term outlook for how much gas and electricity will cost your business.  In fact, we don’t think you need to know much about the industry to be able to tell the direction prices are heading.

Consumer and residential prices make the headlines far more often than non-domestic, but the reasons behind prices going up are universal to both households and businesses.  Indeed, we received a direct notification last week that British Gas intends to bump up its prices for SMEs as soon as this month.

Contributing factors

Your energy bill is split into two halves: commodity and non-commodity.

Commodity represents the actual cost of the energy, or its “wholesale” price.  This is affected by factors such the rate of crude oil production from worldwide groups like OPEC; operating capacity of nuclear generators, ease of distribution; renewable sources; and supply vs demand.  This makes up approximately 45 per cent of your energy price.

Non-commodity parts of your bill are the bits that can vary wildly from month to month.  They include transmission and delivery costs of energy (IE transporting it around the country and getting it to your business); levies and taxes from the government; and some costs added in by your supplier to cover their expenses.

For more on the details of your bill makeup, read a blog we wrote earlier here.

In a statement just last week, SSE said it had made the “difficult decision” to increase rates in response to rising wholesale prices and delivering government carbon reduction initiatives.

There have been some short-term problems in distribution of gas globally in recent months too, which can have short-term impacts and cause prices to spike.  So the quick answer to the headline question is a mixture of the above.

 What can I do to combat rising energy prices?

One of the keys to maximising value in energy procurement is taking into account the market conditions when entering a contract.  For example, the market price of electricity for a SME, non-domestic consumer has increased 11.7 per cent from 2013 to 2017, which had itself jumped 23 per cent from the previous five-year period [1] .  There’s a good chance that a business who agreed a contract for a full five-year term will have benefited from some cost saving against that significant rise.

8 things you need to know before switching business energy

The somewhat vague “end of curve” term used in the energy industry sounds fairly daunting, especially for a smaller business with little procurement experience.  But your energy procurement expert should always check out this option for you – especially in the world’s current uneven political climate.

Suppliers aren’t stupid.  They know this is a good way to save money for businesses, so they’ll build their own risk factor into this long-term price.  That means the unit rate you’re quoted will be more expensive than some shorter-term deals.  But, they also want to secure longer term contracts with businesses to guarantee income, so this is an area that provides significant opportunity for deals to be done.

If you can broker a deal at a price that you or your expert thinks is beneficial against long-term predictions (or the “end of the curve”) then it’s certainly worth taking it – not least for the price certainty you’ll gain during that period and the ability to project business expense more accurately.

Want to know more about “end of curve” strategy and how it could benefit your business?  Get in touch today for a free consultation with one of our experts at GAS.

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Paul JohnsonGroup Financial Director

Paul Johnson is very much a home-grown talent.

He joined Great Annual Savings Group in its infancy, fresh from a youth career as a professional footballer with Hartlepool United.  He quickly established a reputation within the business and aced all required accountancy qualifications in the space of four years to become the Group’s Management Accountant.

Several successful projects later, Paul was promoted to Head of Finance.  When the former FD left GAS, he took on the mantle of the business’ most senior finance professional; boasting a string of incredible achievements all under the age of 30.

Quote:

“I have witnessed phenomenal growth at the Group over the many years I’ve worked here and I’m looking forward to guiding the Group into an exciting new chapter.”

Interesting fact:

Paul made his professional debut for Hartlepool United against Bournemouth in the Football League.  Some say Danny Ings still resides in his pocket to this day.