British industry faces an energy cost crisis – and it is set to grow

Behind the political battles over household bills lurks a far greater energy cost crisis. It risks damaging British industry and undermining attempts to boost productivity after Brexit.

Households are paying more for clean power than they should, but official data shows UK bills are still below average compared to the EU.

The picture is more worrying for industrial and commercial customers. In this league table UK businesses pay well above the average. The cost burden they bear is second only to Denmark.

The issue is under discussion at the Treasury. Officials are clear that for the UK to attract inward investment the country needs to be competitive on energy costs, even while taking action to reduce carbon emissions.

“This is why the Government has commissioned an independent review into the cost of energy led by Prof Dieter Helm … to deliver the Government’s carbon targets and ensure security of supply at minimum cost to both industry and domestic consumers,” the Department of Business, Energy and Industrial Strategy said earlier this year.

The Helm review concluded that bungled policymaking and Governmental tinkering has meant the UK is paying “significantly” more than it should.

Andrew Buckley, a director at the Major Energy Users Council (MEUC), agrees. “The report refers to decarbonisation and social policies making up 20pc of bills,” he says.

“For our members we calculate that these costs will reach over 40pc by 2020 and this is the main reason why our industrial power bills are the amongst the most expensive in Europe.”

The Government has already been forced to provide an 85pc rebate on green energy taxes for UK steel makers. The £5m a month refund is meant to help avoid another crisis for the embattled industry. Energy costs remain a threat to other high-energy industries, however. Water companies are some of the highest energy users in the country, alongside factories and the data centres run by some of the biggest tech and telecoms giants

“Some energy intensive businesses receive some relief from these charges but the great majority of commercial and industrial companies amongst MEUC membership do not,” Buckley says. It comes at a time of paramount importance for the economy as Britain prepares to leave the European Union. At the same time the cost of importing parts is rising and attracting skilled labour is becoming more difficult.

Today, an annual electricity bill for one of Britain’s top 10 highest energy users stands at around £120m a year, but within a few years this will rise to £170m

If Helm had his way, all the costs of subsidising Britain’s low carbon power projects – such as wind, solar and new nuclear plants – would be scrapped from industrial bills altogether.

Ilesh Patel, from Baringa Partners, spent the summer working with large industrial users hoping to manage the looming cost crisis.

In a worrying twist he found the most effective efficiency tactics in use today risk accelerating the energy cost crunch for those users with the highest electricity appetite.

solar power
High energy users are reducing their exposure to ngrid costs by generating their own electricity from small-scale generators and solar panels CREDIT: DANIEL SCHOENEN

“The more sophisticated energy-intensive companies are looking at things in three ways,” Patel explains.

The first is by reducing their reliance on the main power grid by generating their own electricity from small-scale power projects on their own sites. These could take the shape of solar panels or micro gas plants which create both heat and power. The mini-system could also include battery storage. “The immediate impact on a bill would be material and clear – just by buying less from the grid,” Patel says.

The second option is to pay less for what you buy. Patel says there is an increasing appetite among major companies to lock-in bilateral deals directly with renewable power generators which can supply long-term, fixed-rate electricity at below the market price.

“The price agreed today would be the same price in 15 years’ time, and there’s no variability on that. That’s what makes it so powerful for energy consumers or a manufacturing facility,” he adds.

Finally, Patel says companies are trying to use less energy in the first place. Efficiency measures may be a relatively low-tech route to tackling spiralling costs but every little bit helps in a crisis with no magic bullet.

The end energy vision for a high-energy manufacturer, water company or data centre could involve using less energy, generating their own power as much as possible, and where not possible contracting to buy someone else’s. The common denominator is using less from the national grid.

For those which are able to insulate themselves against the higher prices of grid-bought power, costs can be reduced. But for those left behind the move away from grid power could mean the problem escalates.

heavy industry
Ultra-high energy users will not be able to go ‘off-grid’ completely, meaning they could be forced to pay a higher proportion of grid costs than those who can afford to generate their own power

Patelel’s three-point plan is not an option for all energy users. For example, a typical one-megawatt solar project – very small compared to a 50-megawatt steel plant – would need land the size of a football pitch.

Trying to find 50 football pitches of land, and then install batteries, is just not practical for a very high energy user, he says. Those left behind will be the most energy-intensive industries and manufacturers which support thousands of jobs across the country, as well as low-income and socially vulnerable households which cannot afford to embrace the new technologies which might be able to help save them money.

“The big question is when will we reach a tipping point,” says Patel. “This is all relatively small-scale stuff when only a few hundred customers can move off the grid, but soon cost reductions in solar and battery storage will make it viable for the vast majority of industrial, commercial and domestic customers to follow.

“Britain will still need its national grid, and will still need the smaller regional networks. But as more customers only ever use the grid as a backup, how can we charge for the network use?”

The cost of maintaining the country’s pipes and wires is calculated by the energy regulator based on how much power or gas is used. If commercial customers only use the grid for backup it will fall to those less able to be self-sufficient to bear the brunt of the grid’s maintenance costs.

Proponents of off-grid generation rightly point out that the trend will help reduce the overall cost of maintaining the grid – but not low enough to protect heavy industry from spiralling costs.

Government intervention will be needed to tackle the energy cost crisis CREDIT: STEVE MORGAN/BRITISH STEEL

“The very largest energy users will struggle to get their bill down without some kind of Government intervention in the cost base. The levers just can’t be pulled by them in the same way as can be done for the vast majority of industrial and commercial consumers,” Patel warns.

The concern is front and centre on policymakers’ agenda but Ofgem’s current review of network costs does not go far enough, according to some.

“The scope of the review that has been launched is woefully narrow in my view,” says one industry insider, who asked not to be named.

“They haven’t included the really long-term issues. How do we charge for legacy costs in a world where domestic and commercial solar is becoming more affordable for high net-worth but not affordable for really low-income or squeezed middle families? Their review doesn’t include this at all.”

Ofgem’s so-called “significant code review” will reveal its findings and proposals in the second quarter of next year and will deliver decisions around three months later. These will only take affect early next decade.

In the meantime, the pressure on industry is unlikely to ease.

Increasing power imports from Europe ‘threatens Britain’s supply’

Britain is importing an “increasing amount” of electricity from continental Europe which is putting its supply at risk.

A new report projects the UK will receive 67TWh of power from interconnectors by 2030 – a 10-fold increase in the projection made five years ago.

In the 12 months to March this year, the UK imported 17.22TWh but exported 2.78TWh.

The Centre for Policy Studies (CPS) argues the more reliant Britain becomes to power from Europe, the more vulnerable it will be to disruptions in supply, sudden price spikes or a wider tightening of capacity which pushes prices up.

It adds the imported electricity also has a “unfair competitive advantage” as it is not subject to the Carbon Price Floor or transmission charges faced by British generators.

It believes rather than cutting emissions, Britain is to some extent “offshoring” them – closing its coal-fired power plants but continuing to buy energy from Europe “which is likely to have come from plants of the same type”.

The think tank argues the UK’s energy policy must prioritise the building of new gas-fired power stations for ensure energy security and the Competition and Markets Authority should launch an inquiry into the role of interconnectors.

Tony Lodge, CPS Research Fellow and lead author of the report said: “At a time when spare electricity generating margins across Europe are falling, it does not make sense to build an infrastructure which risks making the UK over-dependent on imports.

“There are significant supply, cost and market distortion implications of doing this at a time when the government should be looking to strengthen energy security and reduce bills. It would make much more sense for the UK to build up a safe electricity supply surplus from generators in Britain on a fair and level playing field.”


‘Big Six’ unduly dominating UK power policy, new report claims

Large incumbents such as the ‘Big Six’ utilities have a dominant and undue influence over UK energy policy, potentially holding back a clean power transition, a new report has claimed.

The ‘Gridlock in UK Power Markets’ report, co-authored by lobbying group InfluenceMap and  the Friends Provident Foundation, claims that the Big Six maintain “close control” over critical policy details by maintaining close relationships with the Department for Business, Energy and Industrial Strategy and industry regulator Ofgem.

This influence, or ‘regulatory capture’ as the report describes it, is at risk of resulting in a dysfunctional energy market given the rate at which technology trends are changing.

The report argues that energy market incumbents have sought to undermine new entrants to the market and emerging technologies, specifically by campaigning against renewable technologies. This has been enforced by repeated messaging arguing that support of renewables is likely to send power prices up and energy security down, messaging which has caused trouble for trade bodies like the Renewable Energy Association and Community Energy England.

It looks to substantiate its claims by stating that the Big Six, National Grid and trade organisation Energy UK have met with policy makers 166 times in the past two years; more than twice the number of all other power market entrants.

“The research shows the incumbent utilities in the UK, through persistent and strategic capture of the policy process, appear to be clinging to outdated business models. History shows this usually ends badly for the shareholders of the companies most resistant to change,” Dylan Tanner, chief executive at InfluenceMap, said.

The report points at incumbent utilities in Germany, specifically E.On and RWE, which saw a near 80% drop in profitability when the country’s Energiewende – a set of policies enacted in the 2000s to drastically decarbonise Germany’s power generation – began to diminish their standing.

It goes on to suggest that a distinctly similar transition is already gathering pace in the UK, one that stands to be driven once more by the government’s new Clean Growth Strategy, before going on to warn that Big Six investors could see a similar drop in returns.

Colin Baines, investment engagement manager at Friends Provident Foundation, said there is an “emerging consensus” that the UK’s energy market is facing “unprecedented disruption” at the hands of more decarbonised, decentralised and democratised energy.

“It should concern investors that the business models of the Big Six appear to be based on their current ability to maintain the status quo via regulatory influence. It should also be a concern that none of the Big Six’s lobbying activity is sufficiently aligned with this 3D transition, an indicator that they are perhaps not adequately preparing for the market disruption they face,” he added.

The report does however appear to overlook how many of the so-called ‘Big Six’ are increasingly positioning themselves to take advantage of the energy transition.

Earlier this year E.On brought its domestic solar-plus-storage proposition to the UK market, and the company’s CEO Johannes Teyssen has repeatedly spoken of taking a lead in new energy markets. More recently the group connected the UK’s first EFR-backed storage projectand combined with Enel to complete what it billed as the world’s first blockchain-enabled power trade.

Centrica has too looked to steal a march on its rivals in battery storage, with construction of a 49MW battery currently underway. It has also invested in nascent technologies like AI and distributed power platforms, and launched a cutting edge smart grid trial in Cornwall.


industry Big six energy firms lose 163,000 customers as British Gas raises prices

The big six energy companies suffered a record exodus of more than 160,000 customers to smaller rivals in September, as British Gas increased electricity prices for millions of households.

A monthly all-time high of 163,000 people left the largest suppliers – British Gas, EDF, E.ON, Npower, SSE and ScottishPower – which have about 80% of the market.

The surge in customers ditching the big six comes as Theresa May reiterated her claim the market was broken and ministers published draft legislation to cap bills for up to five years.

Jefferies investment bank said 1.1 million customers had already switched this year from the big six to smaller competitors, up 18% on the same period last year.

The big six are likely to see their finances squeezed further by May’s cap and competition from challenger firms, the bank warned.

“Intense competition, combined with the recent announcement of a standard variable tariff price cap, is likely to only magnify UK retail market woes for the big six,” it said.

The industry trade body, Energy UK, hailed the switching figures as a sign that “competition continues to flourish”.

Much of the migration will have been spurred by British Gas hiking its electricity prices 12.5% for 3.1 million of its customers from 15 September. The company was the last of the big six to increase its tariffs, following a round of price rises at the start of the year.

Robert Buckley, research director at energy experts Cornwall Insight, said the statistics showed the market was working. “This just shows that the market is busier and more competitive than ever,” he said.

He agreed with Jefferies’ prediction that 2017 is likely to be a record year for switching. However, Buckley warned that May’s cap, expected to take effect in late 2018 or early 2019, could see the growth in switching stall as consumers are lulled into complacency over bills.

“I think there’s a real risk with any price cap that people who haven’t engaged with the market think that they’ll be OK not to,” he said.

Smaller suppliers such as Ovo and First Utility have been taking about one percentage point of market share every quarter for the last four years, and many of them have welcomed a price cap as their existing tariffs are already well below the level of any likely ceiling.

But there are fears in the industry that even the prospect of a cap could make consumers think they are protected and therefore stick with big suppliers.

Several of the big six have already reported large customer losses this year, with SSE shedding nearly 250,000 between March and June, and Scottish Power down by 100,000 in the first half of the year.

The chief executive of the UK’s biggest energy company, British Gas owner Centrica, this week questioned whether the cheap rates offered by some companies were sustainable.

“Many of the companies who have entered the market currently don’t make any money. One of the things that one needs to watch out for is, is the current market actually sustainable?” said Iain Conn, who has been a vocal critic of a price cap.

The managing director of Centrica’s domestic retail business will be questioned by MPs on Tuesday on the impact of a cap, along with the chief executive ofOvo and the head of the energy regulator, Ofgem.


British Gas owner faces tough choice on dividends as energy price cap looms

The owner of Britain’s largest energy supplier may need to raid its shareholder payouts to withstand a tougher-than-expected government crackdown on rising energy bills.

The looming energy price cap is likely to slash the earnings of British Gas three times deeper than investors first feared, which may force its parent company to cut shareholder dividends by a quarter and could also expose Centrica to the threat of a takeover.

The stark warning from City sources and analysts emerged after Prime Minister Theresa May brought raised the political heat on energy suppliers with the promise to begin legislation on a price cap for some 15m homes.

Roshan Patel at Investec described the Government’s plans as a “sea change in a long drawn-out saga” with “severe” financial consequences for the largest energy suppliers.

For the owner of British Gas it could mean a cut of between 20 to 25pc to shareholder payouts, which last year totalled £459m, in order to weather the political storm.

Meanwhile, City sources have warned that the FTSE 100 group’s dramatic share price plunge to 14-year lows is likely to reignite market chatter over the energy giant as a takeover target.

“A lot of the fear and disappointment in the market is already priced into Centrica’s share price but, depending on the details of the legislation, there could be further to fall,” one City source told The Sunday Telegraph.

Centrica cut its progressive dividend policy last year in order to tackle its onerous debt pile. It will reinstate growing payouts only if it manages to drive debts down, but a snap dividend cut could still be possible, as is a potential takeover of the British energy stalwart.

The sun rises behind electricity pylons near Chester, northern England October 24, 2011. REUTERS/Phil Noble

UK energy price cap will not start this winter – Ofgem

Prime Minister Theresa May stunned the industry last week when she announced a plan to impose price caps on standard variable tariffs (SVT), the basic rate that energy suppliers charge if a customer does not opt for a specific fixed-term deal.

Further details of the government’s proposals are expected on Thursday.

Ofgem chief executive Dermot Nolan said he did not know how long it would take for the government bill to become law, but it would then take around another five months before the regulator could start capping people’s bills.

Around 70 percent of households are on SVTs. May has previously indicated a cap could cut average energy bills by around 100 pounds a year.

Once the law is passed, Ofgem would need to launch a statutory consultation process of around 50-60 days and then allow energy suppliers further time to implement the measure, meaning it could not be in place this winter.

“I cannot comment on next winter as it depends how quickly the bill will go through,” Nolan told journalists during a telephone briefing.

Ofgem had already proposed intervening in the part of the market that supplies more vulnerable customers. A new scheme for this sector would protect around 1 million households next February, it said.

The regulator is also working on plans to extend its price protection plan to a further 2 million vulnerable households by next winter, but Nolan said this would be dependent on the timing of the government’s legislation.

Ofgem said it would now consult the industry on its safeguard tariff for SVTs while the government’s draft bill passes through parliament, and said suppliers in the meantime must step up efforts to provide better value deals.

Britain’s energy market is dominated by the so-called big six providers — Centrica’s (CNA.L) British Gas, SSE (SSE.L), Iberdrola’s (IBE.MC) Scottish Power, Innogy’s npower (IGY.DE), E.ON (EONGn.DE) and EDF Energy (EDF.PA), which account for about 85 percent of the retail electricity market.

British Gas planning to axe rip-off electricity and gas tariffs in last bid to avoid price cap

BRITISH Gas is working up radical plans to axe rip-off standard gas and electricity tariffs in a last ditch bid to avoid a price cap.

Britain’s biggest energy supplier instead wants to shift nearly five million loyal customers onto insurance-style annual deals – which would encourage households to look for a cheaper rate every 12 months.

 Biggest energy supplier British Gas is working up radical plans to axe rip-off standard gas and electricity tariffs

The shift would be a huge victory for the Sun’s ‘Power to the People’ campaign – and force rivals to follow suit.

It came as Energy Secretary Greg Clark yesterday once more warned that the Government could legislate to introduce a price cap if companies carry on “abusing” customers.

Speaking at a Sun fringe meeting at the Tory Conference yesterday, British Gas exec Sarwjit Sambhi said the company wanted an industry wide ban on SVTs – default tariffs which are typically £300 more expensive than online rates.

But he said the company was already trialling replacement tariffs.

And he revealed: “We would not rule out that at some point we may decide to go unilaterally.”

Insiders said confirmation could come immediately after Ofgem sets out its own plans to tackle an estimated £1.4 billion rip-off in the industry.

Ministers have demanded an end to SVTs, because they are typically held by customers who haven’t switched suppliers for years.

Speaking yesterday, Greg Clark dismissed claims the Government had dumped its Election Manifesto pledge to cap prices. He said Ofgem had the necessary powers to act.

 British Gas exec Sarwjit Sambhi and Energy Secretary Greg Clark at a Sun fringe meeting at the Tory Conference

“Suppliers know the detailed behaviour of customers and choose those who are unlikely to switch because they trust the brand or have been with them for decades.

“We know that in the modern age it’s possible for suppliers to have that information and they abuse that trust by racking up the bills.”


InfraStrata gas storage project has potential to ‘exceed expectations’

Gas storage firm InfraStrata said a proposed Northern Ireland project’s potential “exceeds expectations”.

The AIM listed firm wants to develop an above ground gas storage plant at Islandmagee in County Antrim.

Nearly £500,000 has been conditionally raised through a placing to meet costs associated with the project for the next six months.

In an update, InfraStrata said that since June “considerable efforts” have been made exploring a range of both short and long-term options for future value creation for the company and the project.

And the shelving of Centrica’s Rough storage gas field – which has suffered significant difficulties in recent years – had increased the need for such sites.

The firm said in a statement: “The project has shown that it exceeds the board’s expectations in terms of its ultimate potential.

“In the board’s opinion, this highlights the relative undervaluation of the company at this time.

“The board believes that the recent announcement of the phased closure of the Rough gas storage facility by Centrica plc improves the significant potential of the project as a result of this substantial reduction in gas storage capacity in the UK.”

InfraStrata is in talks with a “number of” parties intere4sted in progressing the Islandmagee project.

The company has not ruled out a possible sale of the project and is also looking for longer term funding, including from the European Union.

Adrian Pocock, Chief Executive of InfraStrata, said: “The company stands at a significant crossroads and I am pleased to confirm that we are extremely encouraged by developments since being elected onto the board.

“The project shows excellent scope to create value for our shareholders. The positive engagement that we have achieved with stakeholders and potential and existing partners has been remarkable.

Energy security of both gas and electricity supplies in the whole of the UK is likely to be adversely affected once Centrica’s Rough facility closes in around two years, and there are increasing concerns and focus on energy security.

“We are pleased that we have the opportunity to support the UK and Irish Governments and their respective economies in ensuring continuity of supply.

“We anticipate that once the UK leaves the EU, it will no longer be able to depend upon the EU requirement for member states to support each other at times of peak energy demand.

“The revised strategy of pursuing new potential monetisation routes in conjunction with a flexible, dynamic modus operandi ensures that opportunities are maximised to the enhancement of the Company’s financial position and future.”