Driving the price of your business energy

Domestic utility bills are a hot topic at the moment, but what factors determine how much your business pays for its power supply?

Before the price of power shot up in recent times, you probably didn’t spend that much time wondering about how your gas and electricity was produced.

Why would you? All you need to do is use it, and then pay for it somewhere down the line.

But the current cost of living crisis has everyday people mulling over just why our utility bills are shooting up.

The major source for the UK’s supply of gas has, for a long time, been the United Kingdom Continental Shelf (UKCS) or the North Sea.

However, these reserves are running low and the cost of extraction is becoming less viable. Because of this, we are becoming increasingly reliant on gas from Norway and the UK Interconnector – a direct connection to mainland Europe – and liquefied natural gas (LNG) shipments.

The price of gas is driven by the cost of extraction and transportation – and that’s before the administration and sale costs, plus supplier margins, are added on.

HOT SPOT: The UK is, like many countries, facing a testing time with energy bills

So, what is causing the soaring gas prices affecting everyone in the UK?

Firstly, it’s not simply a matter of supply and demand. We don’t currently have enough gas reserves, as levels with Ofgem (the energy regulator) calling current levels ‘historically low’. 

We have less than nine terawatt-hours of gas (the unit to express energy production and consumption), a paltry amount compared to our European cousins, and a drop in the ocean when you consider that we consume more than 500 TWh of gas each year.

Sanctions brought in in the wake of Russia’s invasion of Ukraine mean other countries are looking to reduce their reliance on Russia’s supply. Demand for gas remains high and avoiding gas from Russia – the country supplies just 5% of the UK’s gas but two-fifths of EU countries – raised the cost of the country’s production.

Climate change is another factor. The UK used so much over the last 12 months due to a longer, colder winter than normal. The dip in temperatures (we have recently experienced the coldest April in the UK in a century) served only to increase the rising demand for gas.

When one considers these factors, plus unforeseen problems with power plants, as well as renewable sources like wind and solar farms producing less power than expected, and increased demand in South America and Asia, that’s quite an impact to have, both domestically and for business premises.

And how about the cost of electricity?

Yes, gas prices are on the rise, but electric bills are spiralling. In wholesale terms, the price of electricity has risen by a staggering 268% in a year. 

The UK has plants that use gas to generate electricity – more than a third of our electricity, in fact – and a gas shortage has a knock-on effect. In short, a lack of gas supplies means there’s also a lack of electric, which ultimately leads to the cost of both rising.

While there has been action taken by industry regulators, any repercussions for energy suppliers may have little or no effect for small-to-medium enterprises (SMEs) who are struggling to stay afloat, given the current state of energy pricing.

Gas prices – what are the other contributing factors?

  • Supply and demand – There can often be a supply-and-demand imbalance in the flow of gas from and to the UK and mainland Europe.
  • Extraction running costs – The operational costs of what is a huge operation to extract natural gas. 
  • Currency exchange rates – The parties involved in deals for the buying and selling of gas are at the mercy of exchange rates.
  • Demand – The factors affecting demand for gas are plentiful, and include how much is needed to help produce electricity, in addition to gas itself being a fuel source.
  • Storage and shipping costs – Yes, liquid natural gas can be stored for later use and shipped to where the demand is. There are significant expenditure costs involved, however.
  • Delivery times – This refers back to supply and demand. The greater the urgency, the more it costs to secure it.

In summary, the primary driving factors behind your SME’s energy bills are that:

  1. We don’t have enough gas to meet the demand – we have a fraction of the reserves stored by the likes of Italy, Germany or France.
  2. Climate change – the long, cold winter endured by Europe and Asia meant a huge increase in demand for gas.
  3. The Russian invasion of Ukraine – Russia has had sanctions imposed upon it and, although countries are looking to reduce the gas they are importing from the country, that has served to raise prices.
    LOW BLOW: Wind farms have struggled to produce the renewable energy it was hoped for last year
  4. Insufficient renewable fuel generation – the UK produced less wind and solar-generated power than was expected last year. Wind farms regularly operated at around a tenth of their full capability and there was the least windy summer in 60 years.
  5. Global demand – the UK wasn’t able to buy the liquefied natural gas they normally would. China, Brazil and Argentina all imported far more LNG to meet their own demands.
  6. Problems with suppliers – it isn’t just one standard supplier that is having problems meeting the demand, it is a similar story across Europe.

So, it’s clear that the cost of our utilities, both for customer and business use, is rising out of control.

You’re probably thinking how glad you are that you enlisted the help of an energy broker to find your business the best deal available. 

They are, after all, the experts in their field. They should be able to find the best prices, and they take the hassle out of switching or signing up your business for you – and may even have access to deals that you wouldn’t have if you’d gone it alone.

EXPERT ADVICE: Did your energy broker have your best interests in mind when they searched for your new deal?

Don’t forget, energy companies are happy to involve these third parties too, especially if they can boost their customer base for them.

The energy supplier is happy, you’re happy and the broker is happy. All’s well with the world, isn’t it?

The only issue remaining is whether the broker has mis-sold your deal to you.

The vast majority of energy brokers (and indeed brokers as a whole) carry out their work diligently and with transparency. This includes how – and how much – they get paid for trawling the market on your behalf.

They may have been working according to the incentives provided by energy companies. This often means commission in the form of extra charges added to the cost of your bills. A breakdown of all hidden charges and costs needs to be made transparent to the customer.

It’s thought that a tenth of small-to-medium enterprises (SMEs) overpay for utilities at their business premises due to hidden fees and undisclosed commission. Many have been locked into unfavourable long-term contracts that offer the broker, rather than their customer, the best deal with the higher unit rate applied to their usage and the customer unable to do a thing about it.

Contributing factors to the cost of electricity

  • Commodity prices – Fuel markets: gas, coal, nuclear power and oil (the latter in particular affecting the price of gas and especially important when demand is peaking).
  • Non-renewable fuel penalties – Non-renewable sources such as fossil fuel gas, coal and oil have to buy a certificate for each tonne of CO2. This penalty for not using renewable sources – effectively a ‘non-green tax’ – also has an impact on the electricity prices.
  • Changes in demand – Behavioural changes by businesses is not only regular but also substantial. As demand grows and shrinks, output needs to match it, which affects the costs.
  • Weather As well as the conditions outside affecting demand the weather can also have an impact on how much renewable energy (eg solar and wind power) is produced. And where fluctuation exists, price changes occur.
  • Storage limits – The ability of energy providers to match the demand is limited, to an extent, by what they can store. Though newer plants are more efficient and reliable, outages can still occur. The reliability of storage plants and the UK’s plan to phase out nuclear power can also be a driving force for higher prices.
  • Delivery times – Again, the greater the demand and the more urgent the need, the more it costs to secure it. This is especially true of the electricity market without the option of mass storage.

It means an unfair relationship between broker and customer is created, and you – the customer – are at the wrong end of the deal. A mis-sold business energy deal means you may be paying more than you should be, or at least more than you were informed you’d be charged. 

If so, you need to take action.

We understand the thought of tackling a compensation claim alone is daunting and you don’t know how to go about it. That’s where we come in. 

Baring Law’s legal team have the expertise to analyse the details of your business energy contract and find out if you have a case to fight for compensation. We’ll do it on a Conditional Fee Agreement (also known as a no-win no-fee) basis so you can make your claim safe in the knowledge that there’s no financial risk to you. You only pay for our services in the event of your claim being successful.

You have nothing to lose and everything to gain. 

What’s more, once you have supplied us with the necessary documents you can sit back and let us handle your case, safe in the knowledge that we have the best lawyers available and we will always act in your best interests and keep you informed as the case progresses.

Consult one of our advisers to see what we can do to get your business the money you should never have been paying out in the first place. Click here to call us or simply hit the icon at the bottom-right of the page if you prefer to speak to us in a webchat.