A Guide to the Non-Domestic Gas and Electricity Retail Markets

Transcription

1 10 January 2017 A Guide to the Non-Domestic Gas and Electricity Retail Markets Outline This guide sets out the key features of the I&C non-domestic gas and electricity retail markets in Great Britain. It is intended to be read by all those who wish to better understand the working of the non-domestic market. Version 0.2 While ICoSS considers that the information and analysis contained in this report are sound all parties must rely on their own judgements when using the information contained therein. ICoSS does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of such information. ICoSS will not accept any liability to any party for any loss or damage arising out of the provision of this guide.

2 Page 2 of 20 Contents Who are ICoSS... 3 Executive Summary... 4 Who are non-domestic customers?... 5 Official Classification of Non-domestic customers... 5 Energy Use - Domestic versus non-domestic... 6 Industry Players... 9 Suppliers... 9 Shippers (Gas Market) Brokers (Third Party Intermediaries or TPIs) Metering Activities ESCOs Contracts & Pricing Domestic Contracts & Pricing Non-domestic Contracts & Pricing Metering Traditional Meters Automated Meter Reading (AMR) Meters Smart Meters Domestic Metering Non-Domestic Metering... 20

3 Page 3 of 20 Who are ICoSS The Industrial and Commercial Shippers and Suppliers (ICoSS) group was formed in 2009 and is the trade body representing non-domestic industrial and commercial (I&C) suppliers in the GB energy market. Members collectively supply three-quarters of the gas needs of the nondomestic sector as well as half of the electricity provided by non-domestic independent suppliers 1. Since its establishment, ICoSS has experienced a level of success that has exceeded the most optimistic expectations of its founders. It is now seen, along with Energy UK as one of the two key influential industry bodies active in the GB retail market. It enjoys regular engagement at the highest levels of Ofgem and DECC, and is routinely requested to sit on the steering groups of all major industry changes. ICoSS also operates a number of industry agreements such as the I&C Code of Practice for resolving disputes between non-domestic gas suppliers, voluntary microbusiness standards and returning outstanding credits to non-domestic customers. ICoSS members were also instrumental in developing the Automated Meter Reading (AMR) Service Providers Code of Practice (ASPCoP), which governs the collection, collation, processing and data storage of data taken from gas meter reads If you wish to find out more please visit our website at 1 :

4 Page 4 of 20 Executive Summary This guide is intended to set out key differences between the domestic and non-domestic retail markets and in particular the key drivers of the non-domestic market. To summarise this guide will set out how: More than 50% of all the gas and electricity consumed in this country is by non-domestic customers. Non-domestic customers are far more diverse in their energy needs and usage than domestic customers. In many cases a single customer will own several sites and will contract appropriately. Competition levels and switching rates are far higher in the non-domestic than domestic markets, with far larger number of suppliers active in the market. The largest suppliers in the non-domestic market are outside of the big six. In the non-domestic market the majority of switches for SME customers are negotiated by Third Party Intermediaries (TPI s) & Brokers with the customer over the telephone, or for larger customers, via contract tenders Large numbers of non-domestic customers have access to real-time metering data via Automated Meter Reading (AMR) devices, which give them the ability to control their energy use.

5 Page 5 of 20 Who are non-domestic customers? Official Classification of Non-domestic customers All sites that are supplied with either mains electricity or natural gas ( energy ) in Great Britain 2 are classified as either domestic or non-domestic premises. A customer who is responsible for that premises is accordingly treated as a domestic or non-domestic customer. Domestic Premises are sites that use energy primarily for domestic purposes; heating, cooking and running electrical appliances in the home. A Non-Domestic Premises is defined as any site that is not a Domestic Premises and so is defined by exclusion. There are also a couple of exceptions to this general rule where a domestic premises may be treated as a non-domestic premises if: The site changes from non-domestic premises to domestic premises during the contract (e.g. a pub being turned into flats). The domestic premises is part of a multi-site contract where the domestic premises is ancillary to the main non-domestic premises (e.g. a caretaker s flat in a school). The customer who has entered into a Contract with the Supplier (licensee) for the supply of gas or electricity to the premises will then contract with the tenants (residents) at the premises for residential or any other accommodation service at the premises (e.g. communal areas in tenanted flats). How a premises is classified determines the status of the customer; a customer who is responsible for a domestic premises is accordingly treated as a domestic customer and similarly for non-domestic premises. The classification / status of the site (domestic or non-domestic) is fundamental to how that site is treated commercially and legally Non Domestic Microbusiness Customer Some non-domestic customers are further classified as microbusiness customers. A nondomestic customer is also a microbusiness customer if it fulfils any one of the following criteria; Has an annual consumption of less than 293,000kWh gas or 100,000 kwh electricity 3 2 This guide is limited to the energy markets in Great Britain; England, Scotland and Wales. 3 These limits apply only to the relevant market so a customer with 300,000 KWh annual gas consumption and 90,000 KWh electricity will be classified as a microbusiness customer in the gas market but would not be in the electricity market.

6 Page 6 of 20 It employs fewer than 10 employees (or the full time equivalent) and has an annual turnover or balance sheet total not exceeding 2 million. Recently intervention by the Competition and Markets Authority into the market has created the concept of relevant or Small Microbusiness Customer. This is a Microbusiness customer with an annual consumption of less than 73,200kWh in gas and <50,000kWh in electricity. In addition two informal definitions are used, SME and I&C/portfolio customers: Small-Medium Enterprises are usually defined as any business with less than 250 employees. The definition is usually used to define businesses that are not large national concerns, or large single industrial loads. I&C/portfolio customers are taken to mean the largest non-domestic customers, with hundreds of sites across the country (such as supermarkets) or the largest industrial plant (such as steelworks). Energy Use - Domestic versus non-domestic The energy trends of the domestic and the non-domestic markets are very different. Below is shown the average energy consumptions for domestic and non-domestic customers, as well as the percentage of total consumption from each market sector 4 : Total Energy Consumption Domestic Non-domestic Electricity Gas Electricity Gas 37% 62% 63% 38% Mean 5 Energy 3,894kWh 13,202 kwh 76,711kWh 675,257kWh Median 6 Energy 3,148kWh 11,707 kwh 8,674kWh NA In general energy usage for non-domestic customers will be higher than for a domestic customer with a far greater spread of energy use depend on the premises type as set out below: 4 All of these values have been taken from the Sub-national electricity and gas consumption summary report Mean is the total value of all consumptions divided by the number of sites. 6 Median is the middle value of the range of consumptions, i.e. an equal chance that an individual consumption will either be above or below the value.

7 Page 7 of 20 Source:BEIS Energy Consumption in the UK These fundamental differences between the nature of domestic and non-domestic customers drive these differences in energy use. Domestic customers are generally homogenous in character in terms of their energy needs and site configuration: Energy usage is for domestic purposes within the home i.e. heating / lighting etc. Variations in energy usage are driven by weather (temperature affecting use of heating) and time of year (amount of daylight affecting lighting). A customer is supplied through a single meter for each fuel for a single site. Energy use for domestic customers generally falls within a given range Domestic customers will be operate to a uniform tariff pricing model, where customers pay for the costs in supplying them via a standing charge and/or a unit rate. By contrast Non-domestic premises and their customers are far more varied in nature and type. Energy usage will be for a wide variety of commercial purposes (offices, shops, light and heavy industry e.g. from corner shops to power stations Energy demands are far less susceptible to weather and seasonal variation, being driven by commercial needs rather than domestic requirements e.g. an industrial process (glass making, car production etc.) has a constant need for energy In many cases non-domestic customers will have multiple (e.g. fast food chains, car manufacturers) sites and will want to purchase energy for all their sites under one

8 Page 8 of 20 contract (bundled offering by fuel). The customer will engage with the market looking for a single supplier for all its electricity meters and a single supplier for all of its gas meters. Such arrangements may also cross national boundaries with customers looking for common arrangements for sites in different countries. Non-domestic customers are far less likely to look for dual fuel (Gas & Electricity) offering as the customer either uses one fuel far more than the other (and so will seek to engage with the market more for the fuel that costs more) or will seek to maximise its bargaining power by aggregating its fuel demand over a number of sites. Most non-domestic customers paying for their energy through bespoke contracts that build a price for that customer taking into account a variety of factors, such as credit risk, etc. Alternatively I&C/portfolio customers using tracking price models where their energy price follows wholesale market prices. These fundamental differences between the two markets determine the nature and numbers of suppliers who supply either domestic or non-domestic customers, the type of contracts offered and the metering solutions that are offered.

9 Page 9 of 20 Industry Players In the non-domestic market, the key industry players are the suppliers, shippers, brokers, metering agents and energy services companies (ESCOs). Suppliers Domestic Market Share Though there has been a drop in the market share of domestic suppliers, over 85% of the market supplied by the former monopoly providers (the Big Six 7 ). As noted above all of these customers are supplied via tariff pricing models. Electricity Gas Source: Ofgem, Retail Energy Markets 2016 Non Domestic Market Share By comparison with the domestic energy market, both the gas and electricity non-domestic markets have a far more diverse range of suppliers, particularly in gas, with the biggest suppliers in the SME gas market not being part of the Big Six. 7 British Gas, EDF, EON, Npower, Scottish Power, SSE,

10 Page 10 of 20 This greater level of competition and range of suppliers means that the non-domestic customer has a wide range of companies to choose from and so have the benefits of greater competition, particularly in the SME and I&C/portfolio markets: Source: Ofgem, Retail Energy Markets 2016 In part this is due to the presence of brokers who facilitate change of supplier activities. In addition, as set out below, there is a much greater level of diversity in pricing models in this market, with bespoke contract pricing being common. This gives a far greater level of choice in the market (see Contracts and Pricing below). Shippers (Gas Market) Due to how the GB gas market was privatised, gas shippers (those who bring gas to Britain or transport within Britain, buy and sell gas and provide suppliers with gas so that they can provide it to end customers), operate the majority of the supply point administration activities on behalf of gas suppliers. This can mean that the organization that deals and contracts with the customer will be separate to the organization that manages the back-office functions of registering that customer with the transporter network, etc. A number of shippers provide this function to suppliers, particularly new entrant domestic suppliers.

11 Page 11 of 20 Brokers (Third Party Intermediaries or TPIs) In the domestic market, most switches are undertaken by customers via online price comparison websites (PCWs), where a customer provides a set of standard information, primarily address (postcode) and an estimate of energy spend. Unlike the domestic market the majority of customer switches (Change of Supplier) for microbusiness or SME customers are undertaken using brokers 8 (though customers can switch by contacting the supplier and some suppliers do operate their own sales team), who act as an agent for either the customer or the supplier: A broker typically undertakes the following activities: Contacting customers usually via telephone sales (but also via direct and industry marketing) typically to offer to act as an agent on their behalf. Once contact with the customer has been made, the broker will then prepare a series of prices for the customer using detailed price matrices that have been provided by suppliers. Brokers usually take a commission as part of the price Once a contract and price has been provisionally agreed the broker will then handle the signing of the contract with the customer, providing copies to both the customer and the supplier. Sometimes the broker will continue to act as the agent for the customer during the lifetime of the contract, for example providing notice to the customer when the contract is due for renewal. Brokers can vary substantially. They can range from large businesses that manage 10,000 s of switches a year down to individual brokers who operate for a small number of businesses. These brokers currently overwhelmingly operate via telephone sales channels; web-based switching, unlike the Price Comparison Websites (PCW s) in the domestic market, has not yet developed as a viable market activity. How brokers play a crucial role in selling and agreeing contracts is covered in the Contracts & Pricing Section below. 8 Ofgem designates brokers who operate in this manner as Third Party Intermediaries or TPIs. Ofgem defines a TPI as an intermediary engaged in direct or indirect activities between a non-domestic consumer and an active energy supplier.

12 Page 12 of 20 Metering Activities There are a number of industry Meter Agents that are engaged with providing services around meter provision and management. They are: Meter Reading Agent (MRA): Procures the read on behalf of the supplier and in some cases the customer (particularly for I&C/portfolio customers). For the vast majority of domestic sites, the read is procured by a representative of the MRA attending the property, examining the meter and recording the meter read (this type of read is usually termed a pedestrian read ). For a small number of domestic customers and a substantially larger number of non-domestic customers, the reads are procured remotely, from Smart or AMR meters. The processes for governing when a read is procured is set out at a high level in the supply licence, and in detail in the Smart Energy Code for Smart meters and for AMR meters in the ASPCoP Meter Asset Managers (MAMs). This is the designation given to such operators in the gas market and covers a variety of activities, including installing and operating the meter, including reading the meter. In many cases the MAMs own the assets as well. Meter Operators (MOPs). An electricity term that applies only to the meter operator (i.e who procures reads and maintains the meter. Meter Asset Provider (MAPs). The term given in electricity (though informally used in gas) to describe the owner of the asset. AMR Service provider. The majority of non-domestic sites with remote meter reading capability have AMR devices installed, which are ancillary devices attached to an in-situ traditional meter. These AMR devices are in many cases provided by a separate service provider. Their activities are governed by the ASPCoP. Data Communications Company. The monopoly service provider for domestic Smart Meters. Non-domestic suppliers may elect to use the DCC for Smart Meters. A single company may provide more than one of these services e.g. in many cases in the domestic market, the energy supplier also provides the meter. In the non-domestic market the market is much more competitive with suppliers and customers purchasing services from third parties. Larger non-domestic customers may also have a direct relationship with the meter provider, having appointed them themselves. The fundamentally different nature of the metering market is the primary cause of the development of this competition in third party market services (see metering section)

13 Page 13 of 20 ESCOs Operating almost exclusively in the non-domestic market, an energy service company or energy savings company (ESCO or ESCo) provide a broad range of energy solutions using metering data to attempt to reduce energy usage at customer premises. The growth of this service has been driven by the rollout of advanced metering (see metering section).

14 Page 14 of 20 Contracts & Pricing The nature and types of contracts in the domestic and non-domestic markets differ substantially, reflecting the fundamentally different needs and goals of both sets of customers. Domestic Contracts & Pricing Domestic Contracts invariably operate to a tariff model (which is that the customer pays a set price for each unit of energy used) which the customer can enter into by contacting the supplier via an online broker (Price Comparison Website) or directly. Domestic suppliers are obliged to offer terms to all domestic suppliers and so a price must be provided in response to this contact. The nature of a tariff is defined by legislation, with the customer paying for all of the costs of their energy supply via two charges: Standing Charge. A set pence/day charge which is paid by the customer irrespective of consumption (although this may be set to zero) Unit Rate. A pence per kilowatt hour price where the customer pays for the energy used. Suppliers are prohibited from separately charging for data provision and also the provision of smart meters; however the costs of these are recovered via one of the two charges above. The impact, and reason for the lack of competition in the domestic market, on contracts from these restrictions is that suppliers are obliged to compete primarily on a uniform contract, and pricing structure (with limited differentiation between payment methods) for each meter type in an area. As the services are correspondingly simplistic and the scope of variation is also limited. This limits innovation and largely explains the lack of competition within the domestic market The main differentiators between suppliers are primarily the price for delivering these services, not the type and nature of the services or contract. A final factor is that the domestic customer is able to give notice to terminate the contract at any time. A termination fee is only paid if the contract is of a fixed term Non-domestic Contracts & Pricing As set out above, most switching by microbusinesses & SME customers will be undertaken via brokers and TPI s, who will negotiate with both the supplier and the customer to get the best price. As would be expected, due to the value of the energy they consume, the largest

15 Page 15 of 20 customers will have their own in house energy buying expertise and issue tenders with potential suppliers bidding in response. This flexibility in price setting is due to the fact that there are far fewer contractual or pricing restrictions imposed on the non-domestic market compared to the non-domestic market; there is no prescription on how a contract is structured or what costs are included in the standing charge or unit rate and what is split out. In addition a non-domestic supplier may refuse to supply a non-domestic customer. Very few independent non-domestic suppliers operate a tariff model, instead building a bespoke set price for a customer. As there are no restrictions on how a contract is tailored, and who they can be offered to, this means that Non-Domestic suppliers can offer a much greater variety of pricing options to nondomestic customers whether standard or individually negotiated. Factors that could affect a non-domestic customer s price include: Credit rating Customer Size Postcode Business type Annual consumption Risk appetite (exposure to market prices) These factors will be taken into account along with the wholesale and transportation prices at the time and will be used to build a price for that customer. As noted it is rare that a tariff pricing model will be used. Were this is the case it is normally an extension of a supplier s domestic pricing contracts and tends to apply to the smaller SME market. The more common pricing options for non-domestic customers are set out below. Fixed Price contracts Fixed price contracts the price per unit of energy consumed will be the same for the duration of the contract. Because the price is fixed, it does not change to reflect any increases or decreases in wholesale energy prices. Fixed price contracts are more prevalent in the SME and Microbusiness market, as they give predictability and do not require the degree of expertise necessary to make informed decisions

16 Page 16 of 20 about more complex products i.e. predict how the wholesale market price may change. Fixed term contracts are typically available for terms up of up to five years. Tracker / Flexible contracts Tracker contracts come with different degrees of exposure to wholesale market volatility. Fully flexible contracts allow a non-domestic customer to track wholesale market movements more directly. Because of the level of involvement / specialism involved in identifying appropriate times to buy, these contracts are usually only available to larger customers with appropriately qualified procurement and trading specialists. Other products take an average of wholesale market prices over an agreed period, and can be combined with fixed price elements according to the customer s expertise and risk appetite. Tracker contracts offer some of the benefits of fully flexible in that they will reflect changes in the wholesale market, but both upward and downward movements will be muted by the averaging process. Block purchasing contracts These contracts are a halfway house between Fixed Price contracts and Tracker / Flexible contracts. The customer will be given the option to fix their energy prices for a specified month or quarter, or to allow prices to fluctuate along with the wholesale market during the specified period. This allows customers to mitigate upward movements in the wholesale market or to take advantage of downward trends. For quarterly blocks, energy can usually be purchased up to 3 quarters in advance and usually up to 5 working days before the relevant quarter starts. Other products allow customers to fix individual months at any point before the relevant month starts. Because of the level of involvement / specialism involved in identifying appropriate times to fix prices, these contracts are usually only available to larger customers with appropriately qualified buyers. Monthly products, in particular, are often only available when a customer has professional energy purchasing / trading resource.

17 Page 17 of 20 Metering With a few very minor exceptions, all energy use in the power and gas markets is metered i.e. the energy used is recorded by a meter. There is currently a government mandate to roll-out remote meter reading capability to all premises in Great Britain by 31 December A market-driven programme to install Automated Meter Reading (AMR) devices at nondomestic sites has been in place for over ten years. This has been underpinned by the development of the AMR Service Providers Code of Practice (ASPCoP), which is supported by ICoSS. There is currently therefore a mix of traditional, smart and AMR meters in the market. Smart Meters have started being installed in mainly domestic premises since The characteristics of each metering type are described below. Traditional Meters The majority of traditional meters in domestic premises are dumb meters, which require the customer or meter reader to manually read the meter i.e. physically read the meter (thus the term dumb meter ) and then send that reading to the Supplier. There is no ability for these meters to send reads remotely or to receive data from the supplier. Automated Meter Reading (AMR) Meters Compared to a Smart Meter, an AMR meter uses the existing traditional meter and includes the connection of a data collecting device onto the in-situ meter. This avoids the need to replace both the gas and electricity meters, as a Smart Meter installation requires. The key difference between this and Smart Meters is the flexibility of the data services and provision to other devices and the ability to aggregate the data from multiple sites, both of which are of advantage to business consumers. This is illustrated below:

18 Page 18 of 20 Source: Energy Assets Smart Meters Smart Meters provide two-way communication between the customer and the supplier via the meter, with the supplier obtaining meter reads and the customer information on its energy usage. The Smart Metering infrastructure is heavily prescribed by regulation and is set out below:

19 Page 19 of 20 Source: DCC The key point regarding a Smart Meter is that there is a separate communications hub communicating with a number of devices in the home, including providing information directly to an In-Home Display (IHD). Though the above will be the arrangement used for most domestic premises, there will be many exceptions to this arrangement, in particular for non-domestic premises that do have a Smart Meter fitted. In addition smart metering technology has only been developed for domestic sized-meters Gas Sites that flow larger gas volumes (greater than 11m 3 ) or electricity sites with current transformer meters (where the load is greater than 100Amp) will be provided with AMR meters. Domestic Metering As of September 2016, over 90% of domestic meters are traditional meters. The remaining meters are smart meters which provide remote meter readings to the supplier currently a series of commercial communication providers, but with the ultimate intention to be via a monopoly communications provider, the DCC. The number of meter readings taken for a domestic customer is infrequent, even for sites with smart meters, as the individual energy consumption for each customer is relatively low and hence there is not the need to settle each customer on a more frequent basis. In addition there is no specific tax regime intended to reduce energy consumption for domestic customers (instead the focus is on energy efficiency to reduce customer bills). This means that the value of an individual meter read for domestic customers is relatively small.

20 Page 20 of 20 Domestic customers will be provided with real-time data via their Smart Meter, usually via an In Home Display (IHD), which suppliers are obliged to offer to each domestic customer. It is anticipated that customers will use this data to try and manage their energy use to cut their fuel bills. Non-Domestic Metering Metering for the non-domestic metering market is far more varied, due in part to the widely differing levels of consumption (and in gas, pressure types) that such customers have, but also due to the different drivers that apply to the non-domestic metering market. There are a number of tax incentive schemes that the government brought in place (such as Carbon Reduction Commitment and Climate Change Levy) that have incentivised large and medium energy users to attempt to reduce their carbon emission, through reduction in energy use. This makes the provision of granular metering data (half-hourly in electricity and daily in gas, aligned with the market settlement time periods) far more valuable for business customers. These tax schemes have been in place since 2001 (Climate Change Levy) and the growth of provision of metering data from this period started at this time. By contrast therefore with domestic metering market that has only seen the growth of remote metering (smart metering) only in the last couple of years, and that by government mandate, the non-domestic market has been installing remote metering for over a decade and therefore has a much higher level of market penetration. It is our estimate that as of the end of 2016, around 50% of the non-domestic gas market has some form of remote metering reading capability and 25% of electricity market. The vast majority of this remote meter reading capability is AMR devices, with comparatively few Smart Metering devices. In response to market demand, Energy suppliers in many cases provide data to non-domestic customers via web-based applications, where customers can look at real time metering information from any location. For many multi-site organisations comparisons can be made between similar sites to attempt drive out best practice. In addition it can be also be used as the basis of a business case to replace machinery, etc. The driver is therefore to be able to process the raw data from the meter to obtain the best insight into a business s energy use, which can only be done centrally. AMR devices suit this form of remote energy management as the emphasis is on providing the read via web-based communications.