Disclaimer: All costs contained within this report are indicative and based on latest market information. 16 th March 2015

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1 Disclaimer: All costs contained within this report are indicative and based on latest market information 16 th March 2015

2 FD SUMMARY The make up of the electricity bill is changing, with non-commodity costs a much larger proportion of the energy bill This means that fluctuations in wholesale price are less visible in fully delivered costs than they used to be New government levies are being introduced from April 2015 to support the UK s move to lower carbon generation under Electricity Market Reform (EMR) The introduction of EMR costs, as well as rising electricity transmission and distribution costs, mean CAPPED: that Good overall for prices budget certainty are likely to increase even where the wholesale price drops In addition, several costs change in April, including taxes and network charges for electricity and gas transportation charges COMMODITY 53% SYSTEM & NETWORK 25% TAXES & LEVIES 21% SUPPLIER COST 1% COMMODITY 39% SYSTEM & NETWORK 24% TAXES & LEVIES 36% SUPPLIER COST 1% Taxes & levies are expected to be 15% higher in 2016 than 2015 with network charges rising to a lesser extent Rising non-commodity costs mean that overall bills will rise over coming years. Mandatory ESOS audits will tell businesses where to invest to reduce consumption to mitigate against unnecessary energy costs in future.

3 TAXES & LEVIES

4 TAXES & LEVIES Renewables Obligation (RO) Feed in Tariff (FiT) CfD Supplier Obligation CfD Operational levy Capacity Mechanism Operational levy Climate Change Levy (CCL) *Charges are expressed as p/kwh Many of the newer charges appearing on electricity bills are there to support UK investment in a lower carbon generation infrastructure Whilst RO has been the main support for renewables to date, this will change from 2017 when the scheme will be superseded by Contracts for Difference This means that whilst RO charges are expected to rise until 2017 indeed by 6.5% - this will level off beyond that point The introduction of Electricity Market Reform (EMR) charges will produce the single biggest impact to customer bills over the next few years, with DECC estimating that the Contracts for Difference (CfD) Supplier Obligation may reach 1p/kWh in 2020 In addition, Capacity Mechanism costs will start in November 2016 and will be based on the volume of energy used at peak winter period

5 SYSTEM & NETWORK CHARGES

6 SYSTEM & NETWORK CHARGES DUoS* BSUoS* Distribution & transmission TNUoS** Settlement AAEHDC* losses % per mth % per mth % per mth *Charges are expressed as p/kwh **Charge is expressed as ave /kva during triad periods System and network costs relate to the system infrastructure from generator through to point of usage, and the ways in which they are charged vary Electricity distribution (DUoS) costs maintain the infrastructure on a localised basis and the costs are different for each region - on average DUoS costs are expected to rise over a three year period, although this is not the case for all regions DUoS costs vary depending on time of electricity usage, for instance charges are much higher at the points when the system is in most demand (peak periods), so reducing consumption at these points can produce substantial cost savings TREND: where Good customers for taking have advantage a pass through contract for these elements Similarly TNUoS charges of market are based volatility on consumption at the 3 points when demand on the transmission system is at its greatest, known as triads. By reducing consumption at peak times, transmission costs can be reduced (on pass through contracts) PROMPT: Good for price optimisation The cost of system settlement is expected to increase by a third , likewise BSUoS costs are set of you to increase have some by 19% appetite over the same for risk period

7 COMMODITY

8 ENERGY MARKET COMMENTARY Electricity Robust wind power has mitigated possible gains to the Day-Ahead contract as over 1GW of nuclear capacity is offline for maintenance and the spot gas contract extends its recent volatility. Gas Curve (p/th) Gas and Power Curve Prices Power Curve ( / MWh) The correlation between curve baseload and NBP gas contracts remains strong with the corresponding Summer 15 contracts currently 97% correlated. Subsequently the current bullish NBP curve stands the predominant driver of the baseload curve Gas The Day-Ahead contract has been volatile over recent weeks torn between wavering supply fundamentals and greater than expected demand following colder than expected temperatures. The curve has begun to strengthen, following increasing concerns for supply going forward. The fresh cap at the Groningen gas field has dampened supply assumptions looking forward as well as gathering uncertainty for European supplies as the crisis in Ukraine continues Summer 15 Gas 42 Summer 15 Baseload 40 Dec- 14 Jan- 15 Feb For more market information contact Inenco s trading desk: asktheanalyst@inenco.com

9 MARKET COMMENTARY

10 ELECTRICITY MARKET REFORM Electricity Market Reform (EMR) is the most significant market change affecting energy bills over the coming years, supporting the UK s transformation to a lower carbon generation infrastructure Contracts for Difference (CfD) was introduced to encourage investment in UK generation by guaranteeing a particular /MWh strike price for each unit generated, regardless of the wholesale market price Contracts for Difference Source: Department for Energy & Climate Change (DECC) The first CfD auctions took place at the start of 2015 with the results announced on 26 th February 2GW of renewable electricity was secured across onshore and offshore wind, solar and energy from waste The cost will be recouped from electricity bills from April 2015 via the CfD Supplier Obligation A CfD exemption is due to come into force this Autumn for electricity intensive organisations that are particularly exposed to international competition The value that is exempted will then be redistributed amongst the rest of the market, meaning a higher cost for other consumers The other key element of EMR from a consumer perspective is the Capacity Mechanism A forecast is produced of the expected demand four years ahead and a comparison drawn with the generation that will be online at that point Any capacity gap identified is put out to auction to mitigated against future outages The cost will start to be recouped from consumer bills from November 2016

11 ENERGY REDUCTION The European Energy Efficiency Directive is Europe-wide legislation that has been implemented via local policies in each member state, including the UK The reach of the Directive is broad with notable themes including: Energy Savings Opportunity Scheme (ESOS) Ensuring that public sector demonstrates best practice in energy efficiency, model energy performance contract guidelines for public sector were published by DECC on 15 th January 2015 Promotion of heat networks, also known as district heating schemes, DECC is providing guidance and financial support to local authorities in the early stages of heat network development ESOS submission date is 5 th December 2015 We are now in compliance year for the Energy Savings Opportunity Scheme, or ESOS This mandates non-sme organisations to undertake accredited audits of their buildings, processes and transport to identify suitable energy reduction recommendations (public sector is exempted) The recommendations must be signed off by a Director and submitted to the Environment Agency by 5 th December 2015 for detailed information visit

12 MANDATORY HH SETTLEMENT What is it? Mandatory smart meters must be implemented for all meters that are profile class 1 4, both domestic and non-domestic From April 2014 all electricity meters of profile class 5 8 have had to be an advanced meter capable of recording consumption data every half hour and with the facility to be read remotely This move has been positive in helping consumers to understand consumption levels across their portfolio and in supporting environmental reporting obligations There is now a call for these meters to be settled on a half hourly basis as well, under Ofgem initiative P272 This should make billing more accurate and robust as well as providing access to pass through charging for the likes of DUoS & TNUoS the benefit of which is that consumers can choose to avoid more expensive periods if they are able to do so There will be an impact on the charges for exceeding agreed maximum capacity with breaches of tolerance expected to attract a significantly higher charge once the change has been implemented Due to be implemented April 2016 although some calls to delay What are the timelines? At present it is expected that this initiative will become live that is to say that all meters of profile class 5 8 will be settled on a half hourly basis from April 2016 Some suppliers have raised concerns over this timeline and a consultation recently closed on 3 rd March with a view to potentially extending the timeline

13 GLOSSARY DUoS Distribution Use of System costs are for the regional Distribution Network Operators to maintain the infrastructure on a localised basis - costs vary for each region TNUoS The cost of using the transmission network, this is usually charged based on consumption at the three retrospective peak demand periods, known as triads BSUoS Balancing System Use of System charges are the cost of ensuring the system carries the correct volume of electricity to meet demand on a tactical or day-to-day basis Settlement also called Elexon costs, these are the pass through costs for reconciling the total system volume used with individual consumer usage, for billing purposes AAEHDC AAEHDC represents an industry mechanism for smoothing system costs out as the cost of carrying electricity to the north of Scotland is very high in comparison with the rest of Great Britain Distribution and transmission losses Factored into costs as 8-9% of electricity is lost from the wires when it passes through the network Feed in Tariff introduced in 2010 to encourage adoption of small scale renewables such as domestic solar panels, the cost of CAPPED: this incentive Good is borne for budget by both certainty domestic and non-domestic consumers Renewables Obligation Renewables Obligation has been in existence since 2002 and has been the main financial support scheme for UK renewable projects Electricity Market Reform is the way in which the UK is transforming its generation infrastructure to support climate change commitments and mitigate against future shortages Contracts for Difference introduced to encourage renewable generation in the UK via guaranteed strike price for each unit generated for qualifying generators Capacity Mechanism TREND: an Good insurance for taking policy against advantage future supply shortages via an auction for those generation technologies of market that volatility are not intermittent (e.g. gas) and don t qualify for CfDs PROMPT: Good for price optimisation of you have some appetite for risk