New Inenco report highlights how business energy costs are facing upward pressure once again - savvy firms need to respond
The past few years have seen something of a hiatus in the long-running debate over business energy costs. A combination of relatively low gas prices, falling renewables costs, energy efficiency improvements, government compensation packages, and Brexit's ability to force all other issues down the political and media agenda have pushed energy cost concerns out of the headlines.
But the underlying issues that made rising energy costs both a business priority and a political hot potato have not gone away. There are now early signs that the debate over policy costs and corporate energy use could be revived in the coming months.
In its response to the news this week that the government's energy price cap will come into effect from January 1st next year, trade body Energy UK stressed that much of the inflationary pressure on energy bills in recent months is completely out of suppliers' control, as gas prices continue their recent upward trend and policy costs - those levies that fund clean energy auctions, energy efficiency and fuel poverty schemes, and grid upgrades - continue to tick up. Observers are warning the government's price cap on standard tariffs will have to be increased within months of its introduction if, as expected, wholesale prices continue to rise.
Yesterday, energy consultancy Inenco offered a similar take, publishing an Energy Costs Outlook report that will make sobering reading for many businesses. The analyst firm's headline conclusion is that volatility in the wholesale markets combined with rising non-commodity charges means organisations face up to a 50 per cent increase in the cost of energy by 2020 compared to 2016 levels. It adds that prices could more than double by 2032.
In the shorter term, this winter could result in a more than a 10 per cent increase in the total cost of energy compared to winter 2017/18, "fuelled both by wholesale rises and an increase in some indirect charges such as the Capacity Market levy", Inenco said.
David Oliver, senior energy consultant at Inenco, predicted businesses are now facing an energy cost "double whammy" characterised by "pressure on both commodity and non-commodity sides of the bill". "Whilst flat or falling wholesale costs have previously helped to mask the impact of rising non-commodity charges, all elements on a business' energy bill are currently forecast to increase," he warned.
The recent volatility in the wholesale markets makes it difficult to predict precisely how energy cost trends will develop over coming months, especially given prices could be further impacts by Brexit-related currency fluctuations. However, these known unknowns are augmented by a number of known knowns, which suggest upward pressure on energy prices will continue. For example, Inenco notes that a rise in the Climate Change Levy in April will lead to increased costs for many firms. Meanwhile, potential changes to the Energy Intensive Industries (EII) exemption threshold may offer more industrial users relief from the cost of renewables levies, but will also increase non-commodity charges for other users.
The report also acknowledges that the headline figures conceal a hugely varied outlook for different types of businesses. As such, it provides an outlook for a range of different businesses under a variety of scenarios, exploring how whether a firm qualifies for the soon to be halted Carbon Reduction Commitment (CRC) or the EEI exemptions will have a significant impact on their energy costs. For example, it projects that medium-sized energy users could see bills rise by over 40 per cent by 2020, large commercial energy users could see bills rise by 45 per cent, and industrial energy users could see costs increase by between 22 per cent and 41 per cent.
In the longer term uncertainty over future energy costs is set to continue, with a range of scenarios possible depending on how quickly electric vehicles are deployed, how effective smart and flexible grid technologies prove, and whether low cost and subsidy-free clean energy projects are deployed at scale.
However, the outlook for the short to medium-term is pretty clear. It is highly likely energy bills will rise in the coming months and there is a good chance they could climb significantly over the next few years.
How then should businesses respond?
It is all but inevitable some will step up lobbying for a reduction in environmental levies and further exemptions for a wider range of energy intensive businesses. But there are no easy answers for government in the face of such lobbying. A further watering down of levy-funded programmes would jeopardise the UK's emissions targets, offering additional exemptions to more industries would push up costs for consumers and non-exempted sectors, and proposals to switch energy efficiency or clean energy funding to general taxation are likely to be blocked by the deficit hawks at the Treasury.
Consequently, the more effective way to tackle rising bills is for firms to step up efforts to curb their energy use. "This is the tenth successive year of price rises for business energy users and whilst the 'low hanging fruit' of energy efficiency may have already been picked, there is still more that organisations can to do reduce costs," explained Oliver. "It has never been more important for businesses to re-assess their energy risk management strategies to consider how to mitigate rising costs, from demand management to building a business case for capex investment in new technology."
The report highlights a number of steps businesses should take, including checking whether they are eligible for EII exemptions, securing Climate Change Agreements (CCAs) that allow firms to avoid much of the cost of the Climate Change Levy, and using the mandatory Energy Savings Opportunities Scheme - which covers organisations with over 250 employees or a turnover of at least €50m - to identify where cost effective energy savings can be realised. Firms have to file ESOS reports under phase two of the scheme by the end of next year and the government is hopeful the process of undertaking energy audits will help many firms optimise their energy use.
"Of course, there will be many organisations that aren't eligible for discounts on renewable levies, but that doesn't mean they should resign themselves to high energy costs," the Inenco report states. "Every business should make sure that their processes are as energy efficient as possible, as this is the best way to ensure that you're not spending any more than you should be on your energy."
Effective energy audits should highlight a range of energy savings that can be realised at relatively low cost, ranging from lighting upgrades and onsite renewables deployments to the use of increasingly mature demand response services and building management systems. And the scale of these prospective savings are considerable. Energy giant Centrica has published three reports in recent months setting out how energy-saving clean technologies can slash costs and carbon emissions for a wide range of businesses. The first calculated how energy-intensive industrial and manufacturing sectors could save at least £540m on their energy bills by adopting clean technologies such as solar arrays and battery storage systems. The second analysed the healthcare, industrial, and hospitality sectors and concluded they could meet more than half of their greenhouse gas reduction targets for 2030 by deploying distributed low carbon energy technologies. The third showed how the NHS could save £130m a year by upgrading its energy systems.
Energy bills are climbing again and it is only a matter of time before the topic of corporate energy costs and green levies is politicised once more, especially if Brexit leads to a further spike in energy prices. However, for savvy firms the most effective response remains much the same as it has always been: understand how you are using energy, embrace energy efficiency at all times, and actively consider whether clean energy technologies can deliver a viable return on investment for your organisation.
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