Archive for March, 2013

Chancellor George Osborne yesterday announced his latest budget, and while there were few surprises – more austerity, lower growth, a few tax cuts balanced by changes to benefits and tax credits – there were also several measures targeted at the energy sector:

  • a ‘generous’ tax incentive scheme to encourage investment in shale gas fracking
  • exemption from the Climate Change Levy (CCL) for the ceramic industry and other energy-intensive industries
  • pledge to take forward two Carbon Capture and Storage (CCS) demonstrator projects in Aberdeen and Yorkshire
  • incentives for the manufacture of ultra low-emission vehicles coupled with a freeze in fuel duty

What does it mean for energy bills?

Short answer: very little for most businesses.

Long answer: ceramic and some other energy intensive businesses will see a small reduction in costs due to the exemption from the CCL, but for the majority of businesses, energy costs will continue to be determined by movements on the energy commodity markets. Implementing a strategic energy procurement process, coupled with efficiency measures, will continue to be the best way to manage energy costs.

Osborne’s fracking affair

While the Chancellor places great hope in shale gas to cut energy prices, there remains considerable scepticism about how significant a part of the UK’s energy future it might play, including from Ofgem and BP (not to mention Greenpeace and Friends of the Earth).

The only operating shale drilling site was suspended last week by Cuadrilla, and it could be at least 10 years before significant production comes on line. This is also conditional on environmental and social acceptance of fracking, with opposition groups already springing up in prospective shale extraction areas, which could delay or prevent drilling, while the scale of economically viable UK reserves remains uncertain.

What was missing?

With George Osborne’s continued focus on shale gas, the complete absence of any mention of renewable generation was notable by its absence in his budget statement, even though renewable projects constitute a significant element of the Treasury’s infrastructure pipeline. No incentives or additional support were announced for low carbon technologies, or, most disappointingly, for businesses investing in energy efficiency measures to reduce consumption and costs.

There was also no mention of the carbon price floor mechanism, due to come into force on 1 April, which will increase electricity costs while raising revenue for the Treasury, and which has been criticised by both business and green campaigners as a stealth tax that won’t reduce emissions.

Overall assessment: the budget measures will have little immediate impact on business energy costs, with the combination of volatile energy markets, growing reliance on imported gas and more government taxes/charges continuing to increase energy prices over the next few years.

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A leading London law firm, based in a large office in the City with an annual energy spend of several £million, historically renewed their energy contracts annually, exposing them to volatile energy prices.

Their contract renewal coincided with a significant spike in the energy market, with prices increasing to £90 p/MWH compared to less than £60 p/MWH a few months earlier. Rather than wait until the renewal point, Energy & Carbon Management (E&CM) advised the company to fix a one-year contract three months in advance, resulting in significant savings compared to waiting to the renewal date.case study-law firm

Although financial markets continued to be spooked by the prospect of ever-rising energy prices, E&CM’s understanding of the energy market, together with the client’s procurement and risk strategy, was used to lock a further one-year contract in place half-way through the current contract as prices fell to around £40 p/MWH.

With prices remaining low, a third one-year contract was agreed well in advance of the contract renewal date, removing the client’s exposure to energy price fluctuations for a further year.

By working with E&CM the company was able to proactively manage their energy procurement process to avoid the worst price increases, achieve considerable savings and cost stability.

Interesting article in BusinessGreen that LED lighting could help cut food waste by emitting less heat and no UV and IR rays, helping food to stay fresher for longer.

According to Sedna.LED, LED lighting can also be used in close vicinity to food, enabling food retailers to light their produce more effectively without reducing its lifespan. The UK’s food waste problem costs businesses and consumers £billions a year, fills landfill sites and increases greenhouse gas emissions, and while LED lighting won’t on its own address this, it could be another benefit, alongside significantly reduced energy consumption, for food retailers to install LED lighting.

The UK’s largest industrial and commercial energy users expect electricity and gas prices to increase significantly over the next five years according to delegates at the Major Energy Users Council customer verdict conference in Birmingham yesterday.

The warning of ever-increasing prices was one of the main messages from the MEUC event, which attracted several hundred delegates from suppliers, customers and energy consultants to debate and vote on the key energy issues impacting their businesses. The Birmingham event was the first of three roadshows, from which the MEUC will collate the results and present the findings to government.

Some quick takeaways from the Birmingham conference:

  • the energy trilemma is no nearer resolution: squaring the circle (!) of energy security, affordability and sustainability will continue to present a major challenge to policymakers and suppliers, with implications for customers…
  • over 60% believe that gas prices will increase by 25-50% over the next five years
  • 40%+ thought electricity prices will increase by 25-50% over the next five years, with a third expecting an increase of 50-100%
  • the increasing proportion of electricity bills accounted for by taxes and levies (30-35% and growing) was highlighted as a major contributor to the anticipated electricity price increase
  • over half of delegates felt 25%+ of current energy usage could be saved through efficiency measures
  • around two-thirds thought felt that greater investment in gas storage and shale gas development was essential to securing future supplies and keeping the lights on

In order to mitigate energy market volatility and provide an element of price stability, several of the companies represented pursued as long-term contracts as possible, though were often constrained by credit terms and the difficulties of making contractual commitments longer than 3-4 years.

While many also felt that the primary reason for switching supplier was a failing by the incumbent (eg invoicing problems) rather than better prices, customers increasingly expect both competitive prices and additional services from their supplier (efficiency support, metering analysis etc).

The final message: the only way to reduce the risk of rising prices is to use less energy.

Energy & Carbon Management’s February energy price review shows the wholesale energy market remains fairly stable:

  • The UK’s stumbling economy (including loss of its ‘triple A’ credit rating), the weakness of the pound and low retail sales contributed to a decrease in prices compared to a year ago: 3.37% in the case of electricity and 0.95% for gas
  • Compared to the end of January however, prices increased slightly: 1.5% up for electricity and 2.25% for gas, in part due to the reduction in gas storage volumes during the recent cold weather

As the winter is almost (hopefully!) behind us, anticipated warmer weather means that these increases are not projected to continue in the next couple of months.

With energy prices expected to rise in the longer-term however, it’s important to monitor the energy market to ensure that you don’t get hit by a sharp price increase come renewal time, and are positioned to take advantage of any dip in gas and electricity costs.