UK energy prices are currently very high, reflecting the energy crisis; a complex challenge determined by a range of factors including politics, geography, and supply.
1) Price volatility
Although we generate a significant amount of our own energy in the UK, we do import energy, such as gas from Norway and mainland Europe, which links our wholesale prices to European and global price volatility. And prices have skyrocketed over the past year.
Depending on the product you buy, there can be a significant difference in price. Day ahead prices are reasonable (85p/therm for gas and £94/MWh for electricity). However, when looking to lock in prices for longer, the market is currently very volatile. This partly reflects concerns over managing the winter without Russian gas supply. Despite EU pledges to transform the energy infrastructure to cope, prices for the year ahead remain high – at 337p/therm for gas and £376/MWh for electricity. Prices are unlikely to reduce in any meaningful way until April 2023, and only then if Europe can comfortably see out this winter without Russian supplies. Following this, we expect prices to decrease but still remain much higher than pre-pandemic levels.
To support our clients, we constantly review our energy trading and procurement options to take advantage of wholesale volatility and recently introducing a new cash-out product to take advantage of day-ahead pricing. We also previously successfully fixed most of our portfolio under wholesale prices that we hedged in 2020, when prices were at record lows.
2) Government intervention
The Government's recent introduction of the Energy Bill Relief Scheme is welcomed, providing protection for both those onboarding and those whose competitively priced contracts have come to an end.
The scheme will provide relief by applying discounts to energy usage for a six-month period. We suspect that this scheme won’t continue beyond the initial six months, and that a more market led price correction will determine prices come April 2023. For our clients, the electricity wholesale price achieved by CBRE is significantly lower than the cap threshold. This is due to our ability to take advantage of a volatile market; a combination of our flexible approach to procurement and our highly experienced team.
3) Non-energy costs
Historically, changes in non-energy costs have tracked inflation rising by c.3% year-on-year, based on CBRE analysis. We anticipate c.10% increase in April 2023, and although the Government has removed certain green levies as part of the calculation for setting the price cap, the impact will be dwarfed by inflationary uplifts.
We're talking to our property managers about the recently concluded Targeted Charging Review (TCR). The changes invoked mean that the cost of maintaining the network which used to be built into unit rates, are now collected as part of the standing charge. Historically, large consumers would attempt to shift consumption to off-peak (cheaper) supply periods, however there’s limited financial benefit in doing so since the changes. CBRE is helping clients review TCR thresholds to minimise the cost impact incurred, but this is a more difficult and less financially beneficial process than load shifting.
Lastly, we’re advising our clients and site teams that the costs of balancing the network, where supply doesn’t meet demand are also on the up. Mainly caused by the sporadic usage patterns seen during lockdown, and now as price increases force consumers to reduce their demand, the costs of balancing the network have soared. OFGEM had introduced a cap on these costs to limit the impact, but this cap has recently been increased.
4) Demand destruction & increased efficiency
Everyone’s longer term goal should be to reduce demand and increase efficiency. With that in mind we recommend our clients and property managers look at their overall usage patterns and reduce where possible.
Some of our buildings have benefitted from a more structured approach to hybrid working, re-thinking how teams are distributed across the building, to minimise the amount of unused space that requires energy.
Making the most of your M&E engineers and their expertise is also important to help reduce usage. Your engineers may be able to suggest ways to get more out of your heating and cooling systems, for less.
We’re anticipating utilities to move more to the forefront of property managers’ decision making over the course of the next year, and likely to remain there going forward. We believe that a strong and consistent utilities strategy can make a significant difference on a portfolio’s overall performance and client sentiment. Although the current market is difficult, we believe that getting the basics right, reducing usage where possible and being proactive in utilities decision making, may help to uncover some otherwise missed value within a property portfolio. Get in touch with our team for guidance on your current utilities strategy.