Energy and Utility Management Consultants

Brexit - Impacts on energy supplies and costs

September 2016

 

 
Following the vote on 23rd June for the UK to leave the European Union, you may be wondering how this change will affect your utility costs. At the Clifford Talbot Partnership we constantly monitor the energy industry and markets, to ensure that we are in the best position to provide our clients with information and advice. This guidance note is intended to look into the various impacts of the ‘Brexit’ vote, and address any questions you may have.
 
 
How has ‘Brexit’ affected the energy markets?
 
Prior to the EU referendum, the electricity and gas wholesale markets followed a steady downward trend for over 12 months, with the bottom of the market being reached in early 2016.
 
As can be seen from the electricity and gas wholesale market graphs, there was a sharp upturn in prices in April 2016, peaking in July 2016 before a gentle decline to date. The ‘Brexit’ vote on 23rd June caused a short term spike in prices, largely due to the loss in value of the pound sterling and the implications this has on economic forecasts (affecting energy demand) as well as the cost of energy imports. However the impact on the markets so far appears to have been short term and limited, with potential for further movement once the next steps for the UK are decided. As a result prices have continued to be driven by more direct factors – such as the unplanned closure of the ‘Rough’ gas storage facility over winter, outages at Norwegian gas fields, and strengthening of the oil market.
 
Besides the direct impacts of Brexit, there are also less obvious knock-on effects – for example, the compounding effect of a weak pound sterling on the issue of limited gas storage this winter, which could result in higher cost to import gas from overseas and hence higher gas and electricity prices over winter.
 
 
How does the market affect electricity and gas contract prices?
 
The ‘commodity’ cost of electricity only makes up about 40% of the price that is charged by suppliers. The remaining 60% is made up from ‘non-commodity’ costs, which include transmission and distribution charges (provision and maintenance of the national and regional networks), and various renewable energy levies and taxes.
 
As a result, electricity prices charged by suppliers are less sensitive to changes in the wholesale market, and are more affected by ‘non-commodity’ costs.
 
By contrast, there is a much lower proportion of ‘non-commodity’ costs for gas supplies and so prices charged by suppliers will more closely reflect changes in the wholesale market.
 
 
What to consider when agreeing energy contracts?
 
The main impact of the ‘Brexit’ vote thus far has been uncertainty, as there are various outcomes which depend upon the next steps the UK takes, governed by a large number of complex and unpredictable factors.
 
There may be direct impacts on your business – whether this is a change in business strategy, selling or buying more properties, or changing building usage – which could have an impact on your energy supplies. For example, energy contracts can sometimes have onerous ‘Take or Pay’ clauses which can result in large penalties if your energy consumption changes significantly, or if sites under contract are sold.
 
To ensure that you are fully informed to make the best decisions for your business, and avoid any potential pitfalls with energy supplies, please do not hesitate to get in touch.

 

 

 

 

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