The alarming future of UK electricity rates

Date

100% Increase in Wholesale UK Electricity Prices

The cost of energy has risen by 100% over the last 12 months and gas prices have hit a record high. By September 2020, wholesale electricity costs stabilised at £43.50 per MWh but since then have shown a substantial recovery. Forward pricing for September 2021 contracts now sits at £107.50 with further increases predicted throughout the Winter, hitting levels that are unprecedented even during pre-COVID times. 

There are many external price drivers for UK gas and electricity markets that can make future trends difficult to predict. As the UK imports a substantial amount of energy internationally (i.e. coal from Russia, gas from Norway and uranium from Kazakhstan) there are also geopolitical factors at play; these can be very difficult to foretell. For some background, the main price drivers for UK energy rates are:

  • UK Allowance prices (a price on carbon for those operating in the UK Emissions Trading System)
  • Exchange rates fluctuations
  • Geopolitical tensions and risk to supplies
  • Temperature
  • UK Gas supply and storage
  • Intermittence of renewables, particularly wind
 

A fleet of oil sea tankers

These factors are generally what affect the wholesale price of an electricity/gas bill. However, a substantial proportion of an energy bill (around 55%) is made up of non-commodity charges. Some of these price components are driven directly by the UK’s commitment to climate change. Likewise, many of the network costs associated with energy bills have seen recent increases in order to support a greater proportion of renewables on the grid.

Historical Trends

The Department for Business, Energy & Industrial Strategy (DBEIS) publishes historical energy prices covering years 2004-2021.

From analysing this data, we can see:

  • A 260% increase in electricity prices, 2004-2021
  • An 84% increase in gas prices, 2004-2021

Over the 17-year data period, this equates to an average annual increase of 8% for electricity rates and 3.6% for gas rates.

This is a modest increase in comparison with current shifts in the market. Historical pricing levels showed greater overall stability compared to today’s rates. With a greater global emphasis now on achieving net-zero, carbon policies have been a large driver in increasing electricity rates. 

Current Market Outlook

Forward contracts for September 21 and Winter 21 are up by 6.4% and 5.9% this week respectively. An increase in demand seems to be the main price driver in this hike along with a reduction in available power supplies. There has also been a strong correlation between UK allowance and gas prices. The following analysis is provided by Open Energy Market:

Given the fundamentally tight supply situation around storage levels, planned and unplanned gas outages in
the UK and Norway, reduced Russian flows as well as elevated coal, carbon and LNG prices, gas and power prices are expected to remain supported over the coming weeks. Year-end forecasts predict that the wholesale cost could peak at around £130 per MWh.

Future Implications

Six carbon budgets were introduced in the UK under the 2008 Climate Change Act. Each providing a five-year statutory cap on UK greenhouse gas emissions to help enable it to meet its targets under the 2015 Paris Agreement. The 5th carbon budget (2028-2032) requires a 57% reduction in emissions from 1990 levels; a very demanding target to reach with current infrastructure. The energy sector is responsible for around 21% of the UK’s total emissions, and hence, we will see huge reform over the coming years which will see a great impact on commercial energy bills.

Analysis by the UK’s Committee on Climate Change (CCC) shows how electricity rates could be affected following policy development as the UK strives to reach its fifth carbon budget. Future projections indicate a 51% increase in electricity prices by 2030 from 2016  levels (based on the value of the pound in 2016) for small/medium users. It is expected that 60% of this increase will result from low-carbon policy. The main increase in low-carbon policy costs comes from support for low-carbon generation, as well as an increase in the Climate Change Levy (CCL).

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