Monthly Archives: November 2017

Businesses are dramatically changing the way they buy energy in Britain and beyond as new technology makes it easier and cheaper to generate their own power.

Home furnishings giant Ikea Group now gets almost half of its U.K. electricity from renewables, while Toyota Motor Corp. taps solar energy to build engines in Wales. Australian bank Macquarie Group Ltd. will unveil on Wednesday a service to help businesses cut energy costs and pollute less, competing with existing suppliers including Centrica Plc.

More and more British businesses are seeking to save money by using locally sourced power, sidestepping utilities and sparking a global market for decentralized energy that’s expected to expand more than 50 percent to $110 billion by 2021. That shift threatens to cut revenue at the biggest traditional power providers, which typically control everything from generation to distribution.

“The Big Six are going to have to significantly change the way they operate,” said Nick Boyle, chief executive officer of Lightsource Renewable Energy Holdings Ltd. in London. “It’s going to be a challenging time for them. They are aware they need to reinvent themselves.”

In so-called distributed generation, power plants are connected to a local network, cutting the costs associated with using the main grid. Companies can also reduce expenses through energy efficiency measures, which can save business consumers 3.9 billion pounds ($5.2 billion) a year in the U.K. alone, according to the Policy Exchange research group.

Macquarie, which bought the U.K. government’s Green Investment Bank Plc in August, will offer companies financing for new generation and energy saving equipment under supply contracts that may be as long as 15 years and have no up-front costs, said Richard Braakenburg, senior vice president of the energy unit. Traditional energy supply agreements usually last one to three years.

Providing the capital up front entices companies to embark on measures they might otherwise put off and the bank’s willing to work alongside traditional utilities, said Braakenburg. “You can bring forward a whole chunk of the investment program rather than having it drip fed.”

Carbon Budget

Distributed energy and consumption savings go hand-in-hand with efforts to tackle climate change. In Britain, the government is legally obliged to reduce emissions by 80 percent from 1990 to 2050 using a succession of five-year “carbon budgets.”

In Europe, renewable-energy developers are being forced to find new customers as lower subsidies from governments squeeze their profit. The cheaper green technology has encouraged more companies to invest in their own generation and efficiency programs.

In the U.S., a key driver of the trend has been companies like Google and Amazon.com Inc. seeking to demonstrate their shift to cleaner activities, said Bruno Brunetti, head of power strategy at S&P Global Platts. Enel SpA, Europe’s biggest utility by market value, started work earlier this month on a wind farm in Nebraska to power a new Facebook Inc. data center.

“Back in the days a utility had absolute control from generation all the way down to retail,” Brunetti said. “Things are changing as end-users are getting more proactive.”

Ikea Independence

Globally, the market for distributed generation will expand by 9.5 percent a year through 2021 from about $70 billion in 2016, according to a BCC Research LLC, an energy analysis company based in Wellesley, Massachusetts.

Ikea plans to be “energy independent” by 2020 and globally plans to spend about 2 billion euros ($2.4 billion) to achieve that target, said Hege Saebjornsen, U.K. and Ireland country sustainability manager. The retailer is already selling energy solutions to its own customers.

But all isn’t lost for Britain’s existing utilities, according to Centrica, the biggest household energy supplier. The utility, which issued a profit warning last week, has responded to the changing market with longer-dated contracts to satisfy customers insisting on bigger cost savings than they’ve enjoyed in the past, including help with finance for new equipment and generation.

Utility profit margins for decade-long contracts can be closer to 10 percent than the near-zero level on some traditional supply agreements, said Gab Barbaro, managing director of Centrica’s British Gas Business unit. And that’s after the energy supplier and business or government customer share cost savings between them, he said.

“It’s all about volume and energy efficiency,”  Barbaro said. Traditional contracts have been “done to death.”

— With assistance by Rachel Morison

Britain’s “big six” energy providers are feeling the heat. Theresa May’s pledge to end “rip-off” fuel bills could lead to a cap on the standard variable tariff paid by a majority of households in the UK. The sector is likely to face a more radical shake-up, should Jeremy Corbyn’s Labour party come to power.

Power suppliers are showing considerable agility in countering the immediate threat of regulation. Two of the biggest, SSE and Npower, are to spin off and combine their UK retail businesses to reduce their exposure to the market. Now Centrica, the parent of British Gas, has said it will scrap its standard variable tariff, replacing it with an “emergency” 12-month default tariff for customers who fail to shop around for a cheaper fixed-price deal.

Whether regulators step in, or whether companies act to pre-empt them, it seems plausible that the gap between the cheapest and most expensive tariffs will narrow, and that price-savvy customers will no longer receive such a large cross-subsidy from the apathetic majority as they have in recent years. It is questionable whether consumers need such protection from their own inaction. But even if there is little change in the average household bill, there is a real benefit in making people more confident that they are paying a fair price for energy.

Public trust in the system is especially important because the UK, like countries worldwide, is grappling with the problem of how to fund the necessary switch to clean energy. At present, there is a damaging lack of transparency over the costs of this transition.

Centrica’s chief executive, Iain Conn, argues that “green taxes” and other government policies that are funded through levies on energy suppliers are the main cause of rising household bills. He and others in the industry want the government to end this practice and meet the costs from general taxation. He has a point.

The true cost of UK policies to support green energy is hotly contested. Centrica says environmental and social policies accounted for £135 of an average power bill of £1,112 in 2016. Independent analysts, and the government’s own advisers on climate change, have different forecasts suggesting the costs are much lower. A great deal depends on the timeframe selected, how one accounts for the carbon tax and whether one factors in renewable energy’s impact in lowering wholesale prices.

A recent review of UK energy costs by the economist Dieter Helm suggests that UK households in fact pay less than the European average for energy — and less on taxes and levies. But green subsidies are significant and they have been higher than initially forecast: a “levy control framework” introduced in 2011 was supposed to cap the costs of three of the main schemes supporting low carbon investment, but costs are likely to exceed the cap in every year to 2021. The Helm review argues it would have been possible to achieve as much at lower cost.

At a time when poorer households are struggling with stagnant wages, cuts to benefits and rising prices for food, transport and other essentials, it will not be surprising if they begrudge paying for decarbonisation policies. Nor is it surprising that energy suppliers resent being blamed for high prices when the government has failed to regularly quantify and explain the impact of its green policies on household bills.

If the government is to win public support for the essential transition to cleaner energy, it must begin with greater transparency over the costs of its policies. Only then can it justify the costs and determine the fairest way to meet them.

The UK’s biggest energy companies made a profit of £1bn last year and have increased their profit margins in recent years despite losing millions of customers to challenger firms, according to Ofgem – the Office of Gas and Electricity Markets.

The energy regulator said the big six suppliers enjoyed a healthy margin of 4.5% on average in 2016 by charging higher prices to consumers who have not switched, with the gap between the best and worst tariffs widening to £300 a year.

Almost half of people who are unemployed or in low-skilled work have never switched supplier, a new report by the regulator found (pdf). For other customers, the figure is below a third.

“Supplier margins have been rising fairly significantly over the last seven years or so,” said Joe Perkins, Ofgem’s chief economist.

“Some of that increased margin is clearly down to increased cost efficiencies but the level of [consumer] engagement also plays a role.”

The regulator found that if energy suppliers made the same profit on poorer-value standard variable tariffs as they did on cheaper fixed-term deals, the big six would have posted a loss of 6% last year.

British Gas made the biggest profit margin last year, at 7.2%, followed by E.ON with 7%, SSE with 6.9% and Scottish Power with 5.2%. Npower and EDF both made a loss.

“Less-engaged consumers appear to allow suppliers to offer very competitive prices to engaged consumers and still make a profit after deducting their operating costs,” the report said.

Theresa May has cited the higher prices for those who have not shopped around as the reason for her price cap on standard variable tariffs.

A spokesperson for the Department for Business, Energy and Industrial Strategy (BEIS) said: “The regulator’s report shows there are still millions of people paying too much for their energy.

“While it is positive to see 1 million fewer people are on poor-value tariffs this year, it is not right that the majority of people remain on them.”

First Utility, one of the biggest challenger firms, said the report was further evidence of why ministers were capping prices.

“It [a cap] is the inevitable consequence of the big six’s lack of regard for their customers and they only have themselves to blame,” said Ed Kamm, the company’s chief commercial officer.

However, the £1bn profit is down from the peak of £1.2bn, with smaller suppliers driving the big six’s market share down to 80%.

“Profit in absolute terms has been falling for the six largest suppliers as they’ve been losing customers to smaller firms, so whilst they’re making a stable or increasing margin on revenues they earn, that revenue base has fallen somewhat as new entrants are coming in,” said Perkins.

Ofgem said it was pleased that households were using a fifth less energy than a decade ago, largely because of improvements in energy efficiency such as insulation and better boilers.

But the regulator is concerned that some people are rationing their use of gas for heating, such as by turning down the thermostat. It believes a third of the reduction in gas consumption over the last 10 years is a result of consumers limiting their heating in response to price hikes.

“Self-rationing is a particular risk for low-income consumers,” said Perkins.

While May’s wider cap is unlikely to take effect until 2019, Ofgem said that a narrower cap on 4m vulnerable households had reduced typical dual fuel bills by £60 a year since being imposed in April.

However, the regulator found the cheapest tariffs had been withdrawn and most suppliers had converged with pricing just under the cap. It would not be drawn on whether May’s cap would have the same effect.

Richard Neudegg, head of regulation at comparison site uSwitch.com, said: “Prices have converged around the level of the prepayment price cap and Ofgem acknowledges that some consumers have seen their bills rise due to the cheapest deals being withdrawn.

“One of the risks of applying a cap to the wider retail market is that the competitive forces which drive prices down will be squeezed out, leaving customers with nowhere to go to escape expensive tariffs or poor service.”

Ofgem’s state of the market report also said the cost of keeping the lights on in recent years could have been cheaper for consumers if National Grid had more accurately forecast the number of power stations required to be on standby during winter.

Another area where households had sometimes paid “a higher cost … than necessary” was for policies cutting carbon emissions from energy, the report said.

“This hasn’t come cheap,” said Perkins, of the subsidies paid by consumers to support windfarms and solar panels in recent years.