After a few years of relatively flat energy prices, many businesses will have seen their energy costs rise significantly in 2018, and as we forecast in our recent energy costs report, this trend is set to continue in 2019.
Not only are wholesale costs steadily increasing, but non-commodity costs are also on the rise – the Capacity Market (CM) levy, for example, jumped from around £40/MWh in 2017/18 to almost £100/MWh this winter. Despite the suspension of the CM itself, it seems that the levy will continue to be collected until the scheme is modified in line with EU State Aid rules.
This means that organisations across industries will be faced with increasing energy bills, and with many also working with tightening budgets, keeping energy costs as low as possible will be a key focus for energy managers in 2019.
With this in mind, here are three key areas for cost-conscious energy managers to focus on this year…
With costs rising on both sides of the bill, it’s never been more important for businesses to prioritise absolute energy reduction; reducing overall consumption is the best way for businesses to mitigate the effects of external factors on their energy bills.
Many organisations that had to complete energy audits under Phase 1 of ESOS simply left their energy efficiency recommendations on the shelf once their reports were submitted, as there’s no requirement for businesses to implement these recommendations. But after dedicating time and resources to achieving ESOS compliance, businesses that don’t act on their recommendations are wasting an opportunity to make the most of this investment.
2019 is a timely reminder as businesses rush to complete their audits and refresh recommendations ahead of the December 5 Phase 2 compliance deadlines, and as recommendations are required to be cost-effective, affected businesses will have calculated how much they can save by implementing them. Therefore, this could be the most straightforward way for many to reduce their consumption.
While the first reports under the new Streamlined Energy Carbon Reporting (SECR) scheme won’t be published until 2020, savvy businesses may also want to start focusing on energy efficiency because their sustainability efforts (or lack of them) will soon be visible to the public.
Businesses that are in a Climate Change Agreement (CCA) also have added incentives to look at energy efficiency, the benefits of the CCA schemes will be enhanced in 2019 as participants will escape the big increase in the climate change levy (CCL) from April. However, such schemes demand on-going efficiency improvements and failure to comply will risk either increased CCL costs or even being thrown out of the scheme!
In addition to reducing their overall consumption, businesses that can be flexible in their energy consumption could also mitigate rising energy bills by shifting their consumption outside of peak periods and participating in demand side response (DSR) schemes. However, in a recent survey of energy managers, two-thirds revealed that they’re not aware of how to use DSR to benefit their business.
While different organisations will have varying levels of flexibility, it’s wise for every business to consider whether they can participate in DSR. Traditionally, DSR was only available to larger users with half hourly (HH) settled meters, but innovative ‘Virtual Power Plant’ aggregator software platforms have enabled HH metered businesses of all sizes to access the benefits of DSR. From load response services, such as the National Grid’s frequency response scheme, to distributed generation or storage for onsite use, there are a range of ways that businesses can get involved in DSR.
The Targeted Charging Review (TCR) is set to level the playing field between those that have the flexibility to reduce their consumption during peak periods and those who cannot, but any changes aren’t likely to come into effect until April 2021, so businesses should have at least two extra winters to benefit from load management. When changes are made, those who currently benefit from reducing load during peak periods are likely to see their network charges rise, but they will still be able to take advantage of other DSR opportunities.
Businesses with less flexibility will need to ensure they’ve got the optimum procurement strategy to weather the current volatile market and to be prepared for future market changes.
Large businesses should ensure that they have a robust hedging strategy in place, and many will find that a flexible approach can help to minimise their exposure to high costs. Businesses that bought two or three years ahead when prices were very low last year, for example, will be feeling the benefits now that the market is high – in fact, they will now be paying around half the current market price for gas (30p per therm (ppt) versus 60p).
The downside is that organisations that are coming out of fixed term contracts could find that their renewal price is much higher than they were budgeting for. However, there are still opportunities to buy in the forward markets, so taking a flexible approach to procurement going forward could soften the blow of rising wholesale costs.
Support from industry insiders
When it comes to creating the optimum energy strategy for your organisation, working with energy industry experts and gaining their insight into the current market and future changes to the industry can be invaluable.
At Inenco, we stay ahead of the curve to ensure that our customers are prepared for future opportunities and challenges – to speak to one of our team, call us on 08451 46 36 26 or email firstname.lastname@example.org.