Energy Prices to Rise: 4 energy trends to look out for in 2017
This time last year, we published a blog post looking at the top 5 things we learnt about the energy industry at the beginning of 2016. 12 months on and we’re looking at a completely different social, economic and geo-political landscape. With Brexit on the horizon, and supply margins predicted to be some of the tightest on record this winter, the energy market has a lot to contend with.
So, why should your business care? Well it’s your prices that will be affected. Read on to find out how.
Independent Suppliers vs. The Big Six
The latest figures from energy market intelligence specialists, Cornwall Energy, have seen the market share of Small and Medium Suppliers (SaMS), also known as Independent suppliers, sky-rocket since 2006. Their more competitive offerings and agility, in the face of changing wholesale market fluctuations, has meant that they’ve seemed to offer appealing alternatives to the incumbent ‘Big Six’.
However, this trend may begin to reverse as the ‘too good to be true’ fixed price tariffs, currently offered by SaMS, become difficult to maintain. The wholesale energy market is currently seeing prices rise again, and while the ‘Big Six’ protect themselves by hedging against price volatility, smaller suppliers can’t – leaving themselves (and their customers) vulnerable.
This risk can be evidenced by the recent closure of GB Energy Supplier, in November 2016, meaning OFGEM had to step in and transfer their customers to Co-operative Energy. Therefore, while SaMS can afford to be more flexible on prices, it’s the ‘Big Six’ who boast security.
That’s not to say that independent suppliers aren’t a good choice. Rising prices will affect both ‘Big Six’ and independent customers alike, as shown by nPower recently announcing a price hike of 9.8% for their domestic customers.
It’s not just the fault of free market fluctuations either, as government policies will also play a part in rising prices. Regulation is currently in the pipeline for a price cap on pre-payment meters, while that’s great for some domestic customers, the money that suppliers will lose as a result of this, and the money they’re also currently spending on the compulsory smart meter roll-out, means that costs will have to be recovered elsewhere. This will most likely come at the expense of commercial or Standard Variable Tariff customers so it’s important to switch to a fixed price tariff sooner rather than later, in order to protect yourself.
Continued Growth of Renewables
Despite the latest Government Public Attitudes Tracker claiming that there’s been a minor drop in support for renewable energy, from 78% this time last year to 74% today, opposition has remained rather low. The percentage of survey respondents who neither oppose nor support renewable energy has risen to 21%, from 17%, over the last quarter. Does this suggest that enthusiasm is waning?
Certainly not from a market perspective. Growth of renewable generation has continued to increase, largely due to the Renewable Obligation (RO) subsidies, Contracts for Difference (CfD) and small-scale Feed in Tariff (ssFiT) schemes allowing the entrance of independent generators. In fact, Christmas Day 2016 set a new record for the amount of electricity generated by renewables, reaching 40% when the day was taken as a whole!
Independent suppliers have been particularly receptive to green energy generation, with many offering green tariffs to their ethically concerned customers. Other independent suppliers, such as Opus Energy, boast a fuel mix of 93% renewable generation, regardless of whether the customer is on a green tariff or not.
Despite proposed government cut-backs, it does seem that renewable energy is here to stay. Not only changing our mindset towards the environment, but also changing the structure of the energy market, moving away from the domination of incumbent thermal energy providers, towards a more open, multifaceted sector.
Diversification & Consolidation
One of the biggest trends we can expect over the next 12 months is that suppliers will be doing everything they can to grab our attention.
For the ‘Big Six’ it will be about diversifying their service offerings in order to attract new customers and retain loyal ones. British Gas, for example, have recently invested in their home services, including boiler and car insurance, not forgetting to mention investment in their innovative Hive Energy Management System, which you can read more about (and compare with Nest and Tado°) here.
Cornwall Energy claimed, in their recent report, that these additional services are set to arguably become “more valuable than actually supplying energy.” Now, that’s a bold claim, but there’s no harm with traditional energy suppliers offering more to their customers than simply ‘cheaper prices’.
In fact, as mentioned above, cheaper prices may no longer be possible. This may result in the consolidation of smaller providers, in order to take on the Big Six. For example, Drax, who own the Industrial & Commercial energy provider, Haven Power, recently also acquired Opus Energy – who specialise in the SME market – and Watt Power, who will allow Drax to diversify their generation activities. This kind of consolidation allows smaller providers to remain dynamic, while also providing real competition to the traditional suppliers.
What will this mean for customers? Greater choice, better customer service and appealing incentives so even though prices may rise, competition will ensure the consumer gets more bang for their buck.
Calls for Regulation & New Government Policies
As the number of new suppliers and technology providers entering the market increases, there’s an ever-greater need for regulation. This has been an ongoing issue that Love Energy Savings have kept up-to-date with over the years, with numerous Competition and Market Authority reports issuing recommendations on how customers could and should be protected.
It’s also important that competition in the sector is similarly protected and that regulation covers the new innovations currently coming in to disrupt the market. Any regulation imposed should support innovation while also ensuring a level playing field, removing any barriers to entry that may restrict fair competition.
Regulators need to provide a framework but should be careful not to overtly intervene as this would hinder competition and possibly result in price hikes for consumers.
A new green paper, recently issued by the Department for Business, Energy and Industrial Strategy (BEIS) laid our ‘10 pillars’ of improvement for the UK economy. This included calls for innovation support and the need to create a long-term road map for affordable energy – especially for UK businesses.
This is a policy that Love Energy Savings have always campaigned for; fair, transparent and honest pricing for UK businesses, something which is far too often side-lined in favour of protecting domestic consumers. As Britain prepares for Brexit, everything must be done to attract new business and support native ones, this includes ensuring energy prices remain affordable.
The future of the energy market, prices and supply is uncertain. Therefore, the best course of action is to lock in cheaper prices now before wholesale costs and changing market conditions force them to rise.
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