Farm businesses facing energy bills increase of up to 400%
© Tim Scrivener Farmers who need to renew their energy contract this autumn are facing cost increases of up to 400% due to the ongoing crisis.
Amid fears many businesses will go to the wall this year due to the extortionate bill increases, lobby groups have called for energy regulator Ofgem to implement a price cap for businesses with 10 or fewer employees, similar to the one for households – though this will still see a typical household gas and electricity bill rise by 80% from October.
Jodie Hisgett, head of commercial sales at NFU Energy, said the market has been in a volatile state since the energy crisis started in September 2021, because of a significant outage with a gas interconnector in France.
See also: Tips to keep farms profitable in face of rising inputs
Since February this year, it has worsened, with energy bills seeing a sharp increase due to the Russia-Ukraine conflict, and Russia’s decision to cut supplies to western Europe.
Ms Hisgett said: “Many energy market experts had hoped things would improve by the summer, but in July technical problems and planned shutdowns at Nord Stream 1, maintenance at the Dragon LNG terminal, French nuclear outages, Norwegian hydro outages and Australian strike action created significant price increases again.”
Experts are uncertain whether any repairs or improvements will be seen this side of winter, with long-term gas supply shortages forecast.
Intervention from the EU to support the gas network has been suggested, but nothing has yet been confirmed.
Businesses generally have bespoke long-term fixed contracts with suppliers that can expire at any point in the year.
“The impact on farmers depends on when they last renewed their energy contract, as contracts signed two to four years ago will be on more favourable rates than contracts signed last year, when prices were already on the up,” said Ms Hisgett.
“Most farmers renewing in recent months have seen increases of anywhere between 100% and 400% in their annual spend, regardless of size.”
Long-term problem
The wholesale price of electricity has increased due to a reduction in available power supplies compared with last year, as well as a rise in network and policy costs, said Alastair Johnson, principal farming consultant at Promar International.
The 80% cut in capacity of the Nord Stream 1 pipeline has massively reduced the amount of gas that can be channelled from Russia to Europe and has helped move natural gas prices to their highest levels since early March.
The effect on farm businesses will depend on energy use, tariff and contract termination dates.
“I was on a dairy farm recently and they have a £1.03/day rate and 13p/kWh, but they have been quoted 58p/kWh fixed for two years so their bill will go from £7,600/year to £32,600/year,” said Mr Johnson.
“It would appear that the energy costs issue will not be resolved in the next 12-18 months, as the new higher fixed prices on renewal appear to be contracted for a minimum of 24 months.
“It would, however, seem that there will be a decrease in energy prices in about 2025-26.”
Concerning outlook
David Horton-Fawkes, chief executive officer of farmer buying group AF, said the outlook for electricity prices is extremely concerning.
“Farmers who were locked into a fixed contract that traditionally expire at the end of September could see unit prices rise from as little as 20p/unit to more than 90p/unit,” he said.
“Generally, growers who rely on heating or cold storage will be dramatically affected. We have potato growers whose electricity bills will increase from £150,000/year to more than £330,000/year.
“Energy is not the only cost to go up – costs of many other inputs are up significantly too.”
If the war in Ukraine ends, there will be some reduction, but not immediately to the rate of previous prices.
Governments have realised the reliance on Russian gas is unsustainable and alternative and local energy generation will be prioritised, but these won’t come on stream for at least two years, said Mr Horton-Fawkes.
What to be aware of
Jodie Hisgett, NFU Energy
- Getting a good price during a volatile market is harder than ever. Shop around and get prices from multiple suppliers. This is the only sure way to get the best possible price.
- Typically, winter prices are higher. Multi-year contracts can offer slightly better rates than a one-year contract, but this means if the market does come down, you will miss the opportunity for better rates until that contract ends.
- Have an energy audit to assess whether you can reduce what you use. Now is the time to look at solutions such as solar installations so you can move towards becoming more self-sufficient.
- If you are getting prices through an energy broker, check how much commission it is including, as you could end up paying more than expected.
Alastair Johnson, Promar
- Consider using a buying group that will take charge of finding the best deal and organising the supplier.
- Alternatively, businesses can bulk-buy electricity directly from the wholesale electricity market, though this is only worthwhile if large amounts are being purchased.
- Make sure the quote covers the entire cost of the potential new contract, and the supplier provides all the details in writing. Read and understand the key conditions of the contract before you sign.
- Dairy farmers should look to put in place variable-speed vacuum pumps, as this will reduce electricity use by 50-70%, and the payback is about five years. Energy efficiency can be improved by using the hot water from milk cooling to wash equipment and using LED lighting on timers.
- Generators tend to be a good short-term solution and ideal for back-up systems, but with high diesel prices and the amount of power required for milking each day, the cost of mains would appear to be a more cost-effective solution.
David Horton-Fawkes, AF
- Look at your cashflow and make a plan. Quantify and understand these prices to determine the effect on your business. You will then be best placed to take the correct action.
- Consider what alternative energy sources are available. On-farm renewable energy generation must be part of the strategy and will reduce cost in the long term, but it’s not going to make a difference in the next six months.
- Finding a new supplier is very difficult at the moment. Those taking on new supplies are often asking farmers to commit to longer contracts that price in the current meteoric increases and anticipate a longer-term reduction. This means prices might look more competitive in the short term, but could prove punitive in the medium to long term.
NFUS electricity survey
NFU Scotland has urged its members to provide details on soaring electricity costs and the effect the issue is having on their businesses.
The survey is available online.
Evidence provided will assist the union’s lobbying on the energy crisis, and the results will be collated ahead of NFU Scotland’s visit to Westminster in September.
Union president Martin Kennedy said the “penny hasn’t dropped” with the government when it comes to the effect the cost of energy is having on business viability, particularly those required to deliver food security and guaranteed food supply.
One Scottish vegetable grower who contacted NFU Scotland will see their current electricity tariff of about 12p/unit run out at the end of September. They were quoted 71p/unit for a new contract, meaning the electricity bill for the year – primarily to cool and store potatoes and vegetables – would jump from about £140,000 to more than £800,000.
The union’s survey asks for details on costs, contracts, renewals and whether businesses have renewable electricity sources on farm, and members have been asked to complete it by 7 September.