Meeting the Challenge of Rising Business Energy Costs
It’s a well-known fact that electricity prices fluctuate. As a business consumer this can be extremely frustrating, especially as energy bills can form a significant portion of cost overheads. Therefore, business consumers should arm themselves with the necessary knowledge to help them mitigate their exposure to market volatility as much as possible, and thus reduce the impact of rising energy prices on their bottom line. There are many ways to do this, and we’ll cover some of the key methods below. The good news is that we are here to help
Businesses are continuing to face steep increases in energy prices this winter due to supply and demand on the global wholesale market. This has driven up the amount providers pay for gas and electricity, and that cost is ultimately passed on to the consumer. There are many factors impacting this supply and demand. A cold winter in Europe last year put pressure on supplies and stored gas levels across Europe have been much lower than normal as a result. Coupled with this, the UK has limited reserve gas storage when compared to most European neighbours.
It’s also well-known that there are limited quantities of fossil fuels & crude oil supplies worldwide, and the higher the scarcity, the higher the cost. It’s estimated that at 2019 rates of production, oil will run out in 53 years, natural gas in 54 years, and coal in 110 years. It took over 66 million years for these fuels to form, and humanity will have depleted their global supply in less than 200 years. This strongly suggests that the costs of traditional fossil-fuel energy will only continue to increase.
Low winds and the resulting reduction in energy generation from wind farms also contributed to soaring energy costs towards the end of last year. This placed more demand on gas powered CCGT stations to cover the shortfall. However, at the same time there was also increased demand for gas from South-East Asia, who were willing to pay more for it. The gas was therefore re-directed to Asia instead of Europe, which in turn drove up the prices even higher. In the meantime, economies around the world were re-opening after the Covid-19 lockdowns placing further demand on already strained gas supplies, leading to the sharp price peak experienced in October 2021.
Most businesses started taking steps towards sustainability and becoming more environmentally friendly when the 2030 targets were announced by EU Leaders in 2020. To pre-empt this, many businesses scrambled to lock-in green business energy prices & tariffs. This sudden demand outstripped supply, and most energy suppliers realised that they couldn’t yet match demand. This high demand coupled with the limited availability of clean energy & gas meant that prices soared, and only those organisations that were well-capitalised could actually afford to implement their decarbonisation plans as expected. By the end of 2021, natural gas prices were up more than 250% since January 2021, which put immense downward pressure on suppliers, with a lot of them ceasing to trade.
It is estimated that the UK will need to invest up to £200 billion to meet its environmental targets and secure energy supplies. Diversifying the energy mix and incorporating more renewables onto the Grid is seen as a hedge against rising wholesale prices, and a viable route to energy decarbonisation. In the past year, roughly 40% of UK energy supply came from gas, exposing the UK’s vulnerability to shortages if continued global high demand leads to reduced availability, and thus sustained volatility.
In the medium to long term there are two major ways a business can take action to mitigate the impacts of increasing and volatile energy prices on their bottom line:
1) Reduce overall energy usage through energy reduction projects and;
2) Self-generate their own electricity.
The challenge of higher prices also brings the opportunities, one of these is Energy Efficiency. It may be time to look again at energy audits that you have carried out or to undertake a new one. In discussions with large energy consumers across the UK
in recent months we have seen a clear pattern where energy mangers and operational managers with responsibility for energy efficiency in organisations have, in the past two years, been focused supporting their organisations in getting through the
pandemic and dealing with the added work that this has given rise to in their businesses. This is particularly the case in the food and manufacturing sectors where changes to processes and additional measures were needed to keep production going.
This has led energy to efficiency projects falling well down the priority list.
As we exit this phase of the global pandemic, now is a really good time to look again at the energy efficiency opportunities that are available across
your operations and to revisit previous energy audits or consider undertaking a new one. Higher project implementation costs are more than likely compensated for by higher energy prices. What may have been considered a long payback a couple of years
ago might now be an opportunity that meets your corporate payback hurdle. Energy efficiency activities rarely generate the same level of coverage or excitement that other energy projects do but, it is the best place to start. Organisations will also
find that opportunities in this area are also likely to align with their corporate sustainability and carbon reduction targets which have also enjoyed greater focus in the past couple of years.
Lighting upgrades, process optimisation,
eliminating steam leaks, variable speed drives, smart controls and compressed air upgrades are just some typical examples of projects that fall under the energy efficiency umbrella and that can delivery real and measurable benefits.
Today, more and more organisations are looking at self-generation of energy as an opportunity that can be developed. This can also be used to decouple themselves from grid pricing, as well as shifting to ‘green’ gas or biofuels, where possible.
This can also be uses as a hedge against market volatility, and an attempt to fix costs as much as possible. So how do they do this? There are a range of technologies available today that facilitate self-generation.
The cheapest and most popular is Solar. A system of solar panels, controls and associated electrical components convert energy from the sun into electricity, typically using photovoltaics (PV). Despite the perception that solar does not work in our temperate
climate in the UK where the sun certainly does not shine every day, solar can in fact make a lot sense. This is particularly the case for facilities that have a consistent seven-day electricity usage profile with suitable roofs or available land where
15% to 20% of the annual electricity requirement can be achieved. The cost of delivering solar has dropped dramatically (by approx. 82%) in recent years. Nowadays, these assets can last for up to 25 years and should cover the cost of the initial investment
in about eight to 10 years. This provides a viable financial return whilst also reducing an organisations’ carbon footprint and de-risking their exposure to fluctuating and volatile electricity wholesale market conditions.
One
of the advantages of solar PV is its ease of integration into existing facilities, there is no requirement to change operations or impact the production process and, like energy efficiency, the implementation of a solar system can support the sustainability
targets within a business. Solar PV can also be provided on a zero upfront capital basis with ESB Energy providing finance, project-management, delivery, and the ongoing maintenance and operation of the solar system throughout its lifetime,
selling back the energy at a discounted and de-risked rate to the end user.
Our range of funded and non-funded solutions make financing large-scale projects easy and affordable, while our expertise and technology ensure your organisation can dramatically reduce its energy costs and carbon emissions.
Speak to
one of our energy experts today to find out how your organisation can cut costs and reduce its carbon emissions.
