The last 12 months have been turbulent. Many organisations have faced unprecedented uncertainty, with a return to business as usual still out of sight.
The past year of rolling lockdowns – local, regional, and national – has bled into a new year, where we face both economic uncertainty and continued restrictions. Saving money and staying afloat will be the top priorities, and all businesses will have outgoings at a time when income isn’t guaranteed. Your energy contract is unlikely to be front of mind, but over the course of the pandemic we’ve seen businesses renewing their contracts, rather than shopping around or falling into rollover rates.
Businesses are looking for certainty and stability at a time when it’s been hard to find. Depending on the exact terms of your energy contract, there may still be room for uncertainty.
Now is the right time to familiarise yourself with your energy contract and to look for those charges or elements that could have an impact on your business.
1. Increases in Third Party Costs
The total cost of energy comprises lots of various charges. Only around half of the final cost of your bill comes from electricity. The rest comes from third party costs (TPCs).
These costs – also called non-energy or non-commodity costs – include the costs of energy distribution and transmission, grid balancing, and environmental charges like the Climate Change Levy. These charges are paid for by energy suppliers, who then charge end users.
Businesses on pass-through contracts will have these costs charged directly, while businesses on fixed contracts should look closely to see which of the costs are fixed, as some may not be.
We expect third party costs to rise this year due to COVID-19. The pandemic created difficult circumstances for the energy network, making it more expensive to manage the grid. The additional costs incurred as a result will be passed through to suppliers. Charges will increase to cover this cost. Some organisations that used less electricity during the pandemic may find their bills have fallen by less than expected, while others who worked throughout the pandemic may find their bills are higher than usual.
To find out more about how third party costs might impact your business over the coming year, download our latest TPC guide from our website at www.havenpower.com/news/charges-on-your-energy-bill
2. Renewables Obligation Mutualisation
The Renewables Obligation (RO) was a support mechanism for large-scale renewable energy projects, administered by Ofgem (now replaced by the Contracts for Difference mechanism).
The RO requires energy suppliers to source a percentage of their electricity from renewable sources. The Renewables Obligation is funded by suppliers, with the costs recouped from consumers.
RO mutualisation happens when the amount paid to Ofgem falls short. As the RO is paid in arrears, this shortfall is spread across all suppliers. The sum any supplier pays is determined as a percentage or proportion of their share of Renewables Obligation Certificates (ROCs).
As a result of difficult trading conditions and the ongoing impact of COVID-19, we expect that mutualisation may occur again in the next compliance period.
3. Targeted Charging Review (TCR)
Ofgem’s Targeted Charging Review (TCR) is intended to reduce distortion across the energy network, ensuring that charges are cost-reflective and paid by the right end-users.
The TCR was introduced because larger energy consumers – who often contribute the most to system stress – are also more sophisticated and better able to predict when prices may be highest. This enables them to lower their consumption during these periods; this is called triad avoidance or red zone avoidance.
The TCR is a wide-ranging programme, with little certainty around the distribution of charges following the review. This creates contractual uncertainty; 2022 is only months away and as a result, many decision makers will have to prepare for potentially increased non-energy costs over the next 12-14 months.
4. Reforecasting and volume tolerance
Volume tolerance clauses are a common element of energy contracts for medium and large business customers. They’re a partial cost recovery mechanism, designed to protect suppliers from significant consumption deviation from a customer’s original forecast. This helps National Grid and District Network Operators (DNOs) to manage the network appropriately.
Typically, tolerance clauses offer variance of around 20% above or below the customer’s pre-calculated annual energy consumption. However, the dramatic impact of COVID-19 on the energy network means that many suppliers are now likely to be more cautious.
While we can try to accurately predict future demand, we don’t know how businesses will be impacted over a sustained period. At Haven Power, we consider circumstances on a case-by-case basis and always adopt a consultative approach with our customers to help them navigate through any challenges. We think it’s vital to ensure that contracts don’t contain any unpleasant surprises.