Energy Efficiency: It’s Now or Never

Energy Efficiency - It’s Now or Never

We are now four months into an ongoing energy (price) crisis. At the same time as announcing the price cap will be increased by £693 (54%) to £1,971, the government announced an energy loan of £200 that, from October 2022, will either reduce bills or be given as a bill of credit. But of course, there's a catch. For the next five years, on April 1st energy bills will be automatically increased by £40; that's like putting a plaster on a gaping wound.

But to understand the next steps to take, let's look at what has got us here today.

What is Causing the Price Hike?

The first thing to make clear is that the energy price increase has nothing to do with net zero initiatives. This is used as a scapegoat by interested parties who have not taken the time or interest to do their own research. It is in fact due to factors affecting the wholesale gas market.

The world is coming out of a two year pandemic. The increased demand this has put on energy, products and resources has outweighed supply. Gas has been affected the greatest. This is due to many factors. A few include: the intermittent nature of some renewable power; disruptions of routine maintenance; accidents; too little wind in Europe; droughts that have cut Latin American hydropower output; Asian floods that have impeded coal deliveries; and Asia's demand for gas as Asian countries transition away from coal - in fact, Asia bought so much gas, much of it is now being turned around at ports and sent back to Europe.

One of the biggest and ongoing factors affecting the gas market is Russia. Gazprom, a majority state owned energy corporation, has been accused of withholding supplies and not providing enough gas to mainland Europe. However, Gazprom made clear in a statement that “The Company’s gas deliveries are carried out as requested by consumers in full compliance with contractual obligations”. In simple terms, though more gas is needed and Gazprom can supply it, they are refusing to offer anymore outside of their contractual agreement with other countries. Further to this, the Nord Stream 2 pipeline, a newly completed gas pipeline that would send gas directly to Europe by bypassing Ukraine has not been given the green light by the EU and the US. This is, in part, due to the ongoing geopolitical situation on the Ukrainian border.

All of this has caused gas prices to increase significantly.

The UK Energy Market

At a national level, for years the big six capitalised on an oligopolistic market. Their shareholders saw big dividends and their bosses even bigger salaries. The government took note of this and moved to liberate the market. This brought in many smaller suppliers, some who innovated, creating a more competitive landscape.

In 2017, the government closed the UK’s biggest gas storage facility. This left the UK only able to store 2% of its annual demand. 

Since August 2021, over twenty-five UK energy suppliers have ceased trading. Many were small firms with modest customer bases in a large market; poorly managed, underfunded, not paying attention to continuity of supply and hedging against fluctuations or just buying energy on the wholesale market and passing it onto customers. Two of the biggest shocks to the market were the collapse of CNG, an energy provider of 27 years, and Bulb, who were placed into special administration by the government and are now seeking a buyer.

If your supplier fails, this does not mean the lights go out. Any credit you are owed (credit being money you have paid into your account to the supplier to cover energy costs) will be returned or added to the new account of your new supplier. You will be automatically switched to a new supplier. However, when you are moved onto a new supplier, they will add you to their standard tariff rate. This is usually the most expensive one. You can usually switch without any exit fees so make sure you check out comparisons as soon as possible. This is part of Ofgems safety net rules.

For the few remaining suppliers still operating in the market, many are not taking on new customers and are now working on very tight profit margins. 22 million households in the UK are on the current price cap, this means suppliers are selling energy for less than they are paying for it. This is why the price cap will be increased from 1st April 2022 and likely again from 1st October 2022.

At present there are no fixed rate tariff deals that are less than the price cap. Under normal market conditions this is usually the other way around. Households and businesses that are still within contracts agreed upon before the current crisis should prepare and budget for the new rates that will be offered. Those that are seeing their prices rise now can either remain on the price cap, move to the price cap rate if exiting your fixed contract allows and offers cheaper energy, or agree to a fixed tariff now ahead of the incoming price cap rise(s). Each option has its pros and cons and should be weighed carefully based on your own long-term circumstances.

Understanding the Increase

To understand what the rate increases mean in financial terms and using Octopus Energy as an example. Before the increase, electricity and gas rates were £0.1525/kWh and £0.0279/kWh respectively. At time of writing, their price cap or flexible tariff stands at £0.2011/kWh and £0.0395/kWh. The fixed rate they are offering customers stands at £0.3282/kWh and £0.08.88/kWh. As you can see, the fixed rate is higher than the flexible rate. 

According to Ofgem, the average household in the UK uses 2,900 kWh of electricity and 12,000 kWh of gas. If we applied these amounts to the tariffs charged by Octopus this presents the following increase:

Consumption Energy Tariff Energy Cost Total
Electricity Gas Electricity Gas Electricity Cost Gas Cost
2,900kWh 12,000 kWh £0.1525/kWh £0.0279/kWh £442.25 £334.80 £777.05
2,900kWh 12,000 kWh £0.3282/kWh £0.0888/kWh £951.78 £1,065.60 £2,017.38
  115%⬆ 218%⬆ 160%⬆

The non domestic market is also seeing extremely high prices with rates for electricity vary from £0.34 - £1.01/kWh. To put this into perspective, a site 2EA recently audited was found to be running on electricity only. We calculated that if they continued to run their electric radiators at current capacity on the new tariff, it would increase their annual bills, on energy cost alone, by £5,782.14, that's a percentage increase of 311%.

Energy Efficiency is More Important than Ever

With an understanding of how the current crisis has come about. How can households and businesses reduce such an increase in costs?

Its one of the most overlooked tools in the box; energy efficiency. It doesn’t grab headlines, it can certainly send the C-Suite to sleep and cause most people's eyes to gloss over. But every opportunity to reduce energy consumption can go a long way in reducing costs and helping businesses be more sustainable.

In the simplest terms, energy efficiency means using less energy to perform the same task.

Imagine a living room has six halogen spotlights in the ceiling. If these lights were left on for 5 hours every evening for a year at £0.3282/kWh, the current fixed rate offered by Octopus Energy, they would cost £251.57 annually to run. If you were to switch these to LEDs, based on the higher rate, these new lights would cost £14.38 annually. This is energy efficiency in its simplest form and you’d instantly reduce your electricity bill by £237.19.

In the case of radiators, as above, The Department for Business, Energy & Industrial Strategy (BEIS) estimates savings of about 1% for each 1°C of thermostat adjustment per 8 hours. So turning down your radiators can save money in the long run.

One of the biggest energy efficiency measures is implementing onsite renewable generation; by installing solar panels or heat pumps for example, your building relies less on the grid and produces energy on site. If a home installed solar panels that produced an output of 1,500kWh, that’s 1,500kWh less that it needs from the grid. Couple this with onsite battery storage and the home could have onsite electricity ready to go at a moment's notice. For readers with domestic properties that are looking to install such technologies, you can visit the Government’s Renewable Heat Incentive Calculator to identify what grants may be available to fund the investment.

For businesses, these measures can also be implemented but it can be a little more complicated. Businesses should have strategies and measures in place that identify their current operational energy profile, this can also include GHG emissions. Once an assessment has been made, then a full audit to identify opportunities that can be implemented should be conducted. Within this financial paybacks should be included. 

It should be made clear that once carbon and energy consumption has been reduced as much as possible within a business's operations, something that should be reviewed annually, then is the time to look into carbon offsetting projects.

Energy bills will rise, that's clear enough. What's even more clear is the need to to reduce consumption through energy efficiency to minimise the impact of these rises. Failing to do so, no matter how mundane the subject, would be like throwing £20 notes out of the window.

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