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This Month in Energy – January

In this new blog series, members of the Powerstar team will take a look at the major events that have impacted the energy sector in the past month, as well as breaking down how it could impact on your organisation. 

For January, Dr Alex Mardapittas provides an overview of the major changes announced for business energy support and how it could increase your energy costs, as well as examining how changing weather is impacting on wholesale markets. 

Earlier this month, Chancellor Jeremy Hunt announced that the existing support scheme for businesses struggling with rising energy bills, the Energy Bill Relief Scheme, will be replaced. From the 1st April, businesses will instead be supported by the Energy Bill Support Scheme, a different and substantially less generous mechanic. At the time of announcement, media including the Telegraph described it as an 85% reduction in support, but a change in the way that support is calculated makes the actual sums a little more complicated.  

How has business energy support changed? 

While the Energy Bill Relief Scheme was a price cap on wholesale energy, the new Energy Bill Support Scheme instead offers a unit discount on wholesale gas and electricity when they exceed a certain level. This is £107/MWh for gas, which sees a £6.97/MWh discount, and 302/MWh for electricity, netting a £19.61MWh reduction. 

With both these upper limits significantly higher than the previous price cap, what this means in practice is that from April 1st, businesses may well see a significant increase in energy costs while receiving no support at all from the new relief scheme. For both gas and electric, the new threshold where support will kick in is around 43% higher than the old price cap, meaning businesses could see huge increases in cost before any support is forthcoming, and even when it does it will provide limited relief compared to the previous mechanism. 

What support is available for energy intensive sectors? 

Additional support for energy intensive industries has been touted since the original price cap was introduced, with the government being criticised since for a lack of clarity in terms of what that support will look like and who it will apply to. 

The exact details are still to be finalised, but the Government has at least confirmed who the Energy and Trade Intensive Industries Scheme will apply to. The list is dominated by manufacturing, food and drink production and heavy industry, but there is also an inclusion for museums, libraries, historical sites, zoos, botanical gardens and nature reserves. These sectors were identified by a review as meeting certain thresholds for energy intensity, or currently qualify for energy compensation or exemption mechanics. More clarification is expected before the end of March, but the ETII scheme will provide support both at a lower threshold and with a larger discount. However, it will only apply to 70% of total energy volume. 

How has weather impacted energy prices? 

The recent cold snap saw National Grid employ its new demand flexibility service in late January in response to a surge in energy demand. More than a million homes and businesses took part in the scheme, which looks to have been effective in terms of balancing available supply with demand. Coal-fired generation was also placed on standby to provide additional capacity if required. 

Despite narrow margins more recently, the wider picture for January has been substantially more positive. For much of Western Europe, unseasonably warm weather has seen record temperatures smashed in at least eight countries. With much of Europe experiencing temperatures in early January more typical of early summer, demand for gas slumped and many countries seized the opportunity to replenish gas storage. 

Despite our relatively low amount of storage, the UK has also benefitted from this dip in prices. Despite the recent cold weather, UK NBP gas prices remain close to a low point last seen in May and below the level seen last year before the Russian invasion of Ukraine. Windy conditions have also contributed, with the UK setting a new record for wind generation on 30th December with 20.91GW. In that 24-hour period, renewable generation in total made up 87.2% of total power demand in the UK.  

Market analysts are already revising down predictions for energy prices later in the year as a result of the slump in gas prices. However, changes in wholesale markets will take time to filter through to bill payers, and any relief is unlikely to come until April or May at the earliest. This means that businesses likely face a difficult period of elevated bills from the end of the current support scheme on 31st March and a predicted decline in costs in early summer. Even if lower prices do transpire, they will likely mark a temporary relief rather than an end to the energy crisis, with some predictions that next winter could be as bad, or even worse, still remaining. Even with gas and power prices trending downwards, they are still between 150% and 200% above pre-pandemic prices, and it could well transpire that what we are currently referring to as the energy crisis is becoming the new normal in terms of energy costs.