Thursday, February 22, 2024

Third party energy costs are forecast to change in 2024 – how will this affect your business?

After a volatile year in 2022, wholesale energy prices have been much more stable in 2023. A mild winter saw strength in storage stocks, helping to suppress prices throughout the year.

Now, in its latest Third Party Costs (TPCs) Guide, Drax Energy Solutions forecasts that overall energy costs will be lower in 2024 due to wholesale energy reductions, providing a much-needed boost for businesses.

Paul Miller, Director at Drax Energy Solutions, explains what you need to know.

Commodity markets

At the start of this year, we saw energy prices on a more reasonable trajectory, which has continued as a monthly decrease ever since. Wholesale energy prices in September are approximately 47% lower than they were in January this year.

The decline in wholesale prices can be credited to a mixture of things. This includes robust gas storage reserves, enhanced supply accessibility and favourable weather patterns.

Looking ahead to next year, pricing dynamics will remain focused on supply and demand factors. A mild winter in 2022 resulted in strong (gas?) storage stocks, helping to suppress the prices throughout 2023 to date. However, there’s still a degree of risk with post-winter wholesale energy contracts as the market vigilantly monitors supply and demand fluctuations that may arise due to potentially colder weather conditions this year.

Third party costs (TPCs)

Over the past few years, a substantial increase in wholesale prices has meant that the TPCs portion of a typical energy bill has decreased from 60% to around 40%. However, the underlying charges for TPCs are still very high compared to the historical data. This means even the smallest change can have a significant impact on your energy costs.

Many third party costs are now forecast to decrease in 2024, while others are predicted to rise. Below is a breakdown of the individual costs that make up this figure and any trends we expect to see in 2024.

Balancing Services Use of System (BSUoS)

In April this year, the National Grid Electricity System Operator (NGESO) shared the fixed tariff for summer 2024 (April to September) and draft tariff for winter 2024 (October to March). We now know that the projected costs for BSUoS will substantially decrease for the upcoming year compared to the current tariffs.

The reduction in forecasted costs for the 2024/25 period is predominantly due to falling wholesale electricity prices topped up by over-recoveries in total costs during 2023. In addition, there’s an over-recovery in 2023/24 winter contingency costs.

Contracts for Difference (CfD)

The CfD Levy has experienced significant fluctuations, which is not unexpected given recent wholesale price volatility. Due to a drop in the wholesale price, the average CfD forecast has increased by £2.60/MWh from 2023/24 onwards compared to Drax’s previous TPCs Guide.

Drax’s experts forecast a fall in CfD costs for 2024/25. However, the CfD scheme predominantly depends on day-ahead wholesale prices as most of the generation is from wind. Therefore, forecasting is challenging, especially given the recent volatility in wholesale prices.

Feed-in Tariff (FiT)

As of April 2023, Guarantees of Origin are no longer accepted under the rules of the FiT and CfD schemes. Therefore, no additional volumes are exempted after the Energy Intensive Industries (EIIs). FiT is forecast to increase in 2024/25 by 8.7% (middle case).

Energy Intensive Industry (EII) changes

In February 2023, the government announced strategic measures to help Britain’s EII become more competitive in the European market. These include increasing the EII Renewable Levy Exemption, a potential new exemption from Capacity Market costs, and a proposed EII Network Charging Compensation Scheme (offering compensation for grid-related charges).

Distribution Use of System (DUoS), Transmission Network Use of System (TNUoS), and Renewables Obligation (RO)

There have been no changes to these third-party costs since the Spring TPCs Guide, and forecasts remain the same.

Paul Miller, Director at Drax Energy Solutions, shares: 

“The past 18 months in the energy market have been a testament to its resilience and adaptability. With the unprecedented market conditions, including high wholesale prices and notable volatility, we’ve witnessed Government and Regulatory intervention.

Since our last Third Party Costs (TPCs) Guide in April, we’ve seen the emergence of the Energy Bills Discount Scheme, and now, we eagerly await Ofgem’s forthcoming review of the non-domestic supply market this autumn. Notably, the industry is experiencing an accelerating pace of modifications and significant code reviews, all outlined in the new Autumn Third Party Costs Guide.

Looking ahead to 2024/25, we forecast a range of third party costs will decrease, with fluctuations and new, potential changes, while other TPCs will increase. Drax remains dedicated to providing reliable, sustainable, and forward-thinking energy solutions, and we’re working closely with our customers to understand these changes and minimise their costs going into 2024.”

To find more about third party costs, energy market news, analysis from the past few months, plus forecasts, download the Drax Autumn TPCs Guide here – Drax Autumn TPCs Guide.

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