2nd April 2020.
We are focused on helping our clients with practical steps to mitigate procurement risk, keep cash in their organisation and achieve ongoing Opex reductions.
Our customers are facing multiple challenges; from a collapse in their customer base, supply chain disruption, adapting to remote working and of course the need to try to do the right thing by their people. We understand that managing your utilities can only ever be one part of a very complex picture. But we do hope that over 50 years of corporate experience helps us to bring both perspective and some practical advice that may help to navigate these choppy waters.
None of the immediate challenges are easy for either our clients or utility suppliers and there won’t be a one size answer that fits all circumstances but we’re finding some common issues around the need to mitigate risk, protect your cash position and secure ongoing OPEX reductions. We focused on outlining 12 potential solutions:
1. Some clients are facing the challenge of having to reforecast procurement volumes and having to understand what this means in terms of any volume tolerance clauses that may be in their contract. Suppliers are not at present taking a uniform stance and so it is important to look at all your options and get support on how to best execute them.
2. We are seeing the impact of “Cash-out” arrangements in both the gas and electricity markets. In normal times these arrangements are designed to address the cost of energy balancing incurred by National Grid to the parties who do not balance their inputs and outputs. This is a valuable mechanism in normal times but plainly we are now facing major market abnormality. It is vitally important to ask your consultant to help you make an appropriate intervention with the supplier to mitigate the impact of paying balancing costs via the system price.
3. Cash flow is king at present, and as in a domestic setting, having an early conversation with suppliers in terms of any payment issues is very important. We would always advise prioritising paying your utility bills but only by raising the issues early and proactively engaging with your supplier can you hope to find a manageable solution that would be acceptable to the supplier.
4. The threat of disconnection could add further pressure on an already stressed organisation. We don’t think suppliers will disconnect during the current crisis, except for health and safety issues and will have limited resources to send to site in any event. However, notices can still be automatically issued and it’s wise to deal promptly with suppliers to mitigate any risks
5. Oil and gas prices have collapsed as demand slumps, but supply remains high; this means that utility commodity prices remain very low for future years. Proactive organisations do face an opportunity to take advantage, but there are pitfalls and this needs to be handled carefully. Contract negotiation can be key. Given the ongoing uncertainty, it’s particularly important to be careful about the volume tolerance clauses in the contract. In the current environment, it’s all too easy to leap to tactics rather than thinking strategically. It sounds simple but think carefully about managing risk and how to protect current cheap prices versus the risk of buying more than may be consumed.
Budgets set even a short time ago are also likely to be meaningless. None of us has a crystal ball but most businesses will now need to look afresh at cost forecasting and re-forecast what the current and next financial year utility costs looks like.
6. Being away from your site doesn’t need to get in the way of some short term opportunities to reduce costs. Looking afresh at Meter Operating (MOP) and Data Collection and Data Aggregation (DC/DA) contracts is often just a paper exercise with the potential to achieve refunds and near immediate cost reductions.
7. Experience shows us that I in 5 business utility bills are incorrect and are ready sources of cash. In busy times it can be easy to place this analysis on the pending pile but through “Review & Recover” it is possible to go beyond a standard retrospective audit, focusing in on the individual costs that make up your energy bill. We would encourage a forensic analysis of your historical bills and other related data, looking beyond the invoices to examine the component parts that make up the bill. This creates the opportunity to drive savings out of all elements of the supply chain and recover overcharges from previously paid invoices for up to six years.
8. Also, take the opportunity to review the potential for Available Capacity Reductions. It’s not uncommon to find that the level of capacity that your organisation is contractually allowed to pull from the system is set above the level of demand being recorded. With charges based on each KVA you have available; this is another potential quick win to reduce your cost base. However, this needs to consider any future plans to switch to electric heating or to install vehicle charging points.
9. It will also be important for businesses to look at the impact on the non-commodity cost elements of your utility bills. This could be particularly key for those operating within the Energy Intensive Industry Exemption Scheme. This scheme allows energy intensive businesses (where more than 20% of production costs are linked to electricity) to obtain up to 90% exemption from renewable levies. This will be a discount of around £35/MWh based on 2020/21 levy forecasts. A factory using 20GWh/year would save £700,000 and so it has proved a very attractive scheme for qualifying manufacturers.
Unfortunately, if a factory is shut and workers are still being paid then the 20% qualification criteria may not be met. The same impact may be found due to the low wholesale energy costs. If you drop below the 20% threshold then you exit the scheme and face a further significant impact on your cost base at a time when you can least afford it. Fortunately, the scheme includes a Force Majeure clause that covers reduced energy use due to exceptional circumstances. However, this will require the collation and submission of a detailed evidence pack and submission of a letter to the Secretary of State, in line with the legislation
10. A related challenge will be how to deal with Combined Heat and Power Quality Assurance (CHPQA). This scheme allows CHP operators to get up to 100% exemption from climate change levy (CCL) charges on the gas used in their engine. With CCL set to double in the next 4 years, the benefits of this scheme are increasing year on year.
Where plants are shutdown or running at low production, there is a possibility that the current mode of operation may reduce the efficiency of their CHP and boiler plant. If the efficiency falls below certain thresholds, then the plant becomes liable to pay some CCL charges. We would encourage early action to assess whether the pandemic is likely to have an adverse impact on your CHPQA assessment. In cases where this is likely to apply, we would advise contacting the administering body and building a case to seek a dispensation.
11. For those businesses covered by Streamlined Energy & Carbon Reporting (SECR) requirements, the good news is that the reporting deadline has been put back by 3 months; aligned with the recent relaxation in Company annual return deadlines. Where possible, we would still encourage the prompt collation of submissions, but the delayed deadline does remove the immediate hassle and enable focusing on other business challenges; particularly if key personnel are absent from your organisation.
12. In the wake of the last few weeks it is easy to miss some of the good news that was in the Chancellor’s recent Budget. The Climate Change Agreement scheme was extended from an original end date of 2023 by a further two years to 2025 and has already re-opened for new applications. We would encourage all organisations to work promptly to take advantage of the extension period and at least secure a cost advantage in the longer term.
The scheme requires eligible businesses to achieve carbon savings in line with targets defined for their sectors. Those businesses that fail to hit their targets must buy carbon in order to off-set their additional emissions. The targets are set over a 2-year period, with the current one due to end in December 2020.
However, the normal metric for demonstrating carbon savings is through the reporting of Specific Energy Consumption (SEC). This is usually the kWh of gas and electricity required to produce a tonne, square metre or other measurable parameters of production.
For factories that are currently either shutdown or are running at low production output, there will still be some baseload consumption at the sites, but there is no production. This will have the consequence of increasing the SEC, which means that many factories will appear to have been less efficient when the scheme is evaluated at the end of the year. This means that you may need to buy carbon credits, so would in effect be “fined” for shutting your facility.
Although we can’t offer an immediate solution, Inenco will do all we can in conjunction with relevant trade federations to lobby Government; to either suspend the targets for this year or remove the requirement to purchase carbon credits at the end of the current reporting period.
We helped our clients to weather the three day week and the oil crisis in the 70s, market deregulation in the 80s and 90s and the financial crash in the late 00s. None of those was of quite the same magnitude as the current situation but we do know that we can all find a way through and hope that our practical and transparent advice can help.
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