Rules of the game - planning for change

UK businesses have been operating under more challenging conditions than usual lately. And for manufacturers, the challenge has perhaps been most intense.

Across the nation, budgets are stretched, sustainability and productivity are under the spotlight and Industry 4.0 has created new pressures as well as opportunities; suddenly, managing the expectations of stakeholders, shareholders and consumers requires extra investment in talent and technology. Managing energy correctly is a vital part of this picture – and can seem challenging. However, keeping your eye on the ball when it comes to energy will help you stay ahead of the game. Here’s why.

Protecting the bottom line
During 2018, wholesale prices for gas and electricity were running at a 10-year high. This was driven by several factors including: a diminished gas supply, high carbon prices and an increased demand for energy across the globe. Add Brexit uncertainty and currency fluctuations to the mix and it becomes easy to see why energy has been on the radar of any business concerned about their bottom line. Energy prices may have started to come back down in recent weeks, but unfortunately price volatility is always likely. So, getting an energy procurement strategy in place that can offer your business some protection from unexpected costs is more important than ever. For example, demand side response schemes help you make the most of flexible consumption, while a corporate Power Purchase Agreement (PPA) secures longer-term price stability. And of course, expert advice on risk management can also save money and bring peace of mind.

Changing infrastructure, changing costs
Rising gas and electricity prices are important, but they’re only one part of the picture. As we transform towards a greener, more decentralised and interactive energy future, manufacturers have a raft of new regulation and potential new costs to consider. Staying up to speed can seem like a daunting task but will help to take the sting out of any changes. So, let’s look at some of the big-ticket items it’s worth knowing about:

UK network charges
Ofgem recently published a summary of its proposed work plan for 2019 – 2021. Notably for businesses, this includes a focus on networks and system operation. The aim is to ensure that the right price controls are in place and that transmission networks operate effectively as our energy system evolves. Two key things to look out for are:

  • RIIO-2: Network companies will enter a new price control period from April 2021 – known as RIIO-2 – and for businesses this will translate as a change to energy costs, which must be budgeted for accordingly.
  • Targeted Charging Review: Already underway, this review is looking at how electricity network charges are recovered in Great Britain. At present, most network costs are collected through residual charges. These charges don’t vary with network usage. However, Ofgem is consulting on how to ensure that costs are shared more fairly. There are two proposals on the table:

1. A fixed charge tiered in relation to usage, using line loss factor and connection voltage as a guide.
2. An agreed capacity charge methodology. Payments will be decided by a capacity agreement between a business and their network operator but won’t take account of actual usage.

A decision on the Targeted Charging Review is expected in June 2019, with implementation from April 2021 - spelling a revision to charges for businesses.

  • Embedded benefits: If your business has on-site generation, it’s crucial to keep up-to-date with changes to embedded benefits. Ofgem is proposing to remove the cost reductions that smaller generators currently receive, replacing the Balancing System Use of System (BSUoS) benefit with a charge. 
  • DUoS and TNUoS: Finally, Ofgem has also started a review into Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges. For TNUoS, this will specifically address the balance of costs between generation and demand, whereas the DUoS review will consider the balance between usage-based and capacity-based charges, which could result in a change to these costs in future years.

Capacity Market update
The Capacity Market was introduced as a core element of Electricity Market Reform to provide a kind of insurance policy against the possibility of blackouts. It was designed to ensure reliability of supply at an affordable price; using an auction mechanism to secure additional supply during anticipated crunch points.

On 15 November 2018, the European Court of Justice (ECJ) ruled that the European Commission (EC) had not carried out a sufficient impact assessment of the Capacity Market when making their decision to grant state aid for the scheme. Because of the ruling, the Capacity Market did not comply with state aid requirements and its associated auctions and payments have been suspended.

Capacity Market costs are recovered from end users via electricity bills, impacting business electricity costs. While waiting for an outcome, Government has stated that they expect National Grid to continue to operate the Capacity Market as normal, but without payments to agreement holders. They have then confirmed an intention to hold a T-1 top-up auction this summer for delivery in 2019/20. Of course, any agreements awarded will depend on the Capacity Market being reinstated following a favourable outcome from the EC’s investigation. This will determine the ongoing impact to business energy bills – so for now, it’s a case of wait and see.

Planning for change
The energy marketplace, much like the manufacturing industry, is evolving towards a better, more sustainable future. As our nation strives to meet its ambitions on energy stability, sustainability and affordability, and our UK industries make forward strides despite a financially turbulent and politically uncertain environment, it’s vital that businesses stay informed and budget effectively for change. At Ørsted, our teams work hard to keep businesses in the know. Our regular industry updates are available to everyone on our website – keeping you up to speed on industry change and on top of your game.