It has been a turbulent 6 months for the UK energy system and the challenge faced from soaring wholesale costs has escalated significantly. Energy prices have quadrupled in the past year, and now utilities are one of the most significant items of expenditure in a service charge budget, putting increased pressure on property managers as there is limited protection for lessees. But what can be done to ensure supplies are both secure and competitive?
The energy crisis was initially driven by a perfect storm of market forces, with reduced supply and increased demand being the overarching culprit. As economies around the world rebound from the pandemic, there was record demand for gas which pushed global gas prices to a 13 year high. This, combined with a limited supply from Russia, reduced wind generation, several unexpected nuclear outages, and a large fire at a major interconnector, pushed wholesale energy prices to record levels with the effects felt worldwide.
Whilst energy suppliers do usually allow headroom for market fluctuation, the unprecedented spike has meant that customers are paying less for energy than it costs suppliers to purchase energy. This is an unviable business model and naturally presents significant challenges for energy suppliers, with 28 energy firms collapsing as a result, affecting more than 2 million UK households.
This is now exacerbated by the crisis in seen in Ukraine. Russia is western Europe’s largest natural gas supplier with many nations wholly dependent on Russia for 100% of their needs. There are concerns that Russia could restrict supplies in response to sanctions imposed by the west, and whilst the UK’s reliance is only 3%, any disruption to the flow of gas to Europe would cause energy prices to increase worldwide.
Last month, Ofgem announced the energy price cap would increase to £1,971 in April, to account for rising wholesale costs. The cap, initially introduced in 2019, has largely served its purpose to protect domestic energy customers from increases to standard variable and default tariffs. However there are now fresh concerns energy bills could reach £3,238 a year when the cap is adjusted in October, as a result of the conflict in Ukraine.
With soaring fuel and food prices putting increased pressure on household budgets, and the UK inflation rate currently at 5.5%, Ofgem’s announcement couldn’t have come at a more difficult time. However, increases to the price cap are significantly exceeded by costs facing heat network customers, who have been hit hardest by the ongoing energy crisis. This is because the price cap does not protect communal gas supplies, which are categorised as third-party residential use, meaning they fall outside of the price cap mechanism.
The heat network solution works by generating heat in a centralised location and distributing it to apartments via a network of pipes. The heat source is generally a communal gas boiler (typically located in a basement plant room), which is supplied by a single energy supplier. Despite supplying residential customers, the communal gas source is classified as commercial and not domestic, meaning gas is purchased on the open market and subject to all the volatility seen.
Unfortunately as heat networks are not currently regulated, little can be done to minimise the impact of rising wholesale gas costs. However, identifying energy saving measures could provide some form of mitigation against increased energy costs. Introducing measures to lower energy consumption, reduce heat losses, and improve system efficiency will all help to lessen the underlying gas expenditure.
There is hope though. Heat networks will eventually become regulated, and Ofgem have been appointed as regulator (announced by BEIS in December 2021). However in the meantime, managing agents should work alongside their respective partners to ensure systems are performing at their intended efficiency, to minimise the impact on resident energy bills.
Whilst we are seeing stratospheric rises in the cost of the fuel required to generate heat, there are clear actions that the conscientious Property Manager can undertake to look after the best interests of their residents. Heat networks are highly sophisticated and carefully engineered systems, designed to provide heat in a way that reduces the impact fossil fuels have on our environment in an economic way. The Property Manager, as part of their Operation and Maintenance (O&M) duties, should ensure that those tasked to complete routine and scheduled maintenance are fully qualified and suitably experienced to deliver this responsibility.
As an analogy, you wouldn’t ask a car mechanic to service a 40-tonne articulated lorry, so why ask a GasSafe qualified engineer, used to operating small domestic or commercial systems, to maintain a block of 100 apartments? At the beginning things might seem fine, however when you come to review the gas supply costs at the end of the service charge period, you could discover the plant has been adjusted to operate on a similar basis to a small domestic system. Our advice is for property managers to apply caution when selecting a contractor to maintain a heat network.
We recommend listening to this Money Box podcast recently aired on BBC Radio 4: Cost of living squeeze for benefits and state pension (heat networks addressed from 11:14minutes).
For more information on heat network efficiency and energy auditing, please get in touch at info@dataenergy.co.uk or 01279 810120.
