Electricity prices are at their lowest since 2012, but a lot of organisations are failing to see any financial benefit - why?
If the price for electricity is so much lower, why aren’t businesses signing up to new contracts seeing such large comparative savings?
This is because there are many factors making up your business electricity bill – not just the price of the actual electricity.
Over time, the proportion of the total cost made up by the actual (wholesale/commodity) electricity has decreased.
In 2014/15, the electricity commodity cost made up about 50% of the total cost of energy. At YPO, we estimate that by October 2015 this will contribute just 43%. Therefore, if the price of electricity fell by 20%, your total costs would not fall by 20% unless other factors also decreased in price.
What actually makes up your electricity bill?
In 2015/16 your business electricity bill is made up of:
- The wholesale costs – the actual cost of the electricity.
- Supplier management costs – the cost of the electricity supplier managing your portfolio. If you are using a broker, they will charge a management fee too. If you join an electricity framework, where a number of customers are managed in a group, the administrative burden to the supplier reduce and should cost less.
- Taxes and levies – such as VAT, Climate Change Levy, Feed in Tariff, Renewables Obligation, and Electricity Market Reform.
Electricity Market Reform (EMR) support initiatives to develop low carbon generation to ensure there is enough power capacity to fulfil demand. Essentially, this makes sure we do not experience power outages and blackouts at times of peak demand. The additional costs associated with this new generation is expected to continue to increase until at least 2020, and is likely to make up an increasing proportion of your bill. These increases will have limited the effect of lower electricity prices for many customers.
Taxes and levies are set by the government and business customers will have to pay these, no matter who their supplier. They are known as pass through charges, as the supplier will pass the cost straight through to the customer.
- Systems and networks charges – these can be referred to as ‘pass through’ costs*. These charges cover the cost of using the electricity distribution and transmission networks. The costs are published annually by the National Grid or your local Distribution Network Operator (DNO).
* If you are looking at changing your electricity supplier, be aware that not all suppliers include pass through costs in their quotes. Ask them if prices are inclusive of all taxes other charges.
For further information and advice on reducing your business electricity bill or energy frameworks, please email [email protected].