Energy under the spotlight
It’s been an interesting week for the energy sector. The Competitions and Markets Authority (CMA) finally issued its report into the domestic and micro-business energy supply markets on Tuesday.
Then yesterday, the much-anticipated review of energy taxes promised by many in the media was barely mentioned by George Osborne in his Budget speech. Although there were some significant energy-related developments hidden beneath the headline issues, of which more in a minute.
But first, after its review of the domestic and micro-business energy markets, the CMA issued its recommendations this week. As you’ll no doubt be aware, this didn’t include the larger business energy market, because it’s widely considered to be working effectively.
Engagement drives competition
Major energy consumers play a role in this, because their level of engagement and interaction is high, which helps to drive increased transparency and competition. Part of the CMA’s recommendations will be to mirror this in other areas of the market.
We are also calling for the establishment of an Office of Energy (which I discussed in last week’s blog) to provide independent, impartial analysis to increase transparency and trust across the whole energy sector.
For example, with energy company profits averaging around just 2.8%, charges of rampant profiteering reported by some sections of the media seem somewhat overblown. Although it is clear that the CMA think that changes do need to be made to provide a fairer system for smaller consumers.
Rising prices concern all consumers
It’s also clear that rising energy prices are an issue for all consumers. And especially major energy users, where an upward trajectory in energy costs is having a serious impact on production costs and international competitiveness.
However, while forecasts suggest that wholesale prices are set to remain fairly static, the share of non-commodity costs including environmental taxes will grow to 64% of the overall energy cost by 2020.
The expectation had been that George Osborne would look to reduce this burden in yesterday’s Budget.
Levy Control Framework untouched
In particular, it was thought that the Levy Control Framework – which funds incentives to low-carbon energy generators via the Renewables Obligation, Contracts for Difference and the Feed in Tariff via taxes on energy bills – would be reviewed. But it didn’t get a mention.
What he did announce, however, is that from 1 August 2015, renewable energy would lose its exemption from the Climate Change Levy, which Osborne described at “outdated”.
Climate Change Levy to change
In the official Budget document, the Treasury said: “This change will correct an imbalance in the tax system by preventing taxpayers’ money benefitting renewable electricity generated overseas, and by helping ensure support for low carbon generation provides better value for money for UK taxpayers.”
This will impact any business buying renewable energy, as well as those who either operate on-site renewable energy or purchase it from a third-party via a Power Purchasing Agreement (PPA). Levy Exempt Certificates (LECs) will become defunct.
Of course, this will also affect suppliers, some more so than others. For example, Drax announced last night: “Whilst we are still assessing the impact of this change, our initial estimate is for a reduction in EBITDA in the region of £30m in 2015 and £60m in 2016.”
We are currently reviewing the impact for our customers, and will be communicating more as soon as possible.
Energy efficiency obligations under review
Energy efficiency also got a mention, with the Budget document stating: “The Government will review the business energy efficiency tax landscape and consider approaches to simplify and improve the effectiveness of the regime. The review will consider the Climate Change Levy (CCL), Carbon Reduction Commitment (CRC) energy efficiency scheme and their interaction with other business energy efficiency policies and regulations. A consultation will be launched in the autumn.”
This is great news, as we’ve long been campaigning for a more efficient and less-burdensome approach to promoting business energy efficiency.
Already, a Treasury ‘community email’ has been circulated to participants in the CRC scheme, Climate Change Agreements scheme and the Energy Savings Opportunity Scheme to notify them of the forthcoming consultation. As more of the actual detail unfolds, we’ll keep you posted.
So all in all, a week of events that will result in significant changes.
What the energy sector really needs is support to create greater certainty for consumers around the three key requirements of affordability, sustainability and security of supply.
The CMA is aiming to support the former in the domestic and micro-business sectors. Let’s hope the Budget changes will ultimately lead to this in the larger business market too, without being at the expense of sustainability and supply security.
Wayne Mitchell is Director of Markets & Innovation for npower Business Solutions
This is a sponsored article.