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Where are electricity prices going?

June 11, 2018

The cost of a kWh paid for by a reasonably sized commercial end-user, typically classified as a half hourly metered site, is made up of the wholesale cost of electricity plus non-energy costs, which covers such elements as use of the wires to get power from the generator to the meter, physical losses, government taxes and levies.

 

Ten years ago, non-commodity costs represented approximately a third of the total price paid.  Today the figure is well over half and forecast to rise to 60% within 2 years……

 

Between October 2016 and October 2017, the commodity cost element of electricity rose by approximately 5%.  Since the turn of the year, or in only 5 months the “average” wholesale cost of electricity has risen by some 20% to well over 6p kWh.

 

Government taxes and levies have risen from less than 3p kWh in 2016 to well over 4p kWh in 2018.  Use of system costs are typically 2p kWh giving an overall benchmark of +12p kWh.

 

Electricity commodity costs are increasingly prone to volatility. 

 

Electricity is not readily storable, and its day to day price is driven by traders and speculators.  Their “sentiment” is influenced by everything from physical disasters and political uncertainty to how hard the wind is blowing over the UK, the cost of oil and gas…… and is therefore difficult to predict. 

 

The wholesale cost of electricity and gas for the coming year 2018/19 has risen by over 20% between February and May 2018.  If these ups and downs are primarily driven by the “Trump effect” and his actions relating to North Korea, Iran and World Trade we should be seriously concerned by the potential and rapid impact on prices of the talks in Singapore failing…. although, temporary supply shortages caused by the “maintenance” season and how hard the wind is blowing cannot be ignored.

 

In the absence of robust models to forecast future electricity costs it may be worth considering historic pricing levels to suggest where cost might be going……. Twenty years ago, “average” wholesale electricity costs peaked at 9p kWh rather than the +6p today. 

 

Based on current data, over the next 2 years non-commodity and use of system costs will typically add a further 1p kWh all things being equal.  And, to accentuate the overall increase in energy costs the Climate Change Levy (CCL) rate will rise from this year’s 0.583 p kWh for electricity to 0.847p kWh in 2019, a rise of 0.264p kWh.

 

Sorry, no good news today, but let’s hope Kim and Donald get on….

 

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