News focus: A shift in the power balance

5 October 2012

9 October 2012 | Anna Reynolds

Anna Reynolds looks at changes in the UK energy sector that aim to deliver a secure supply of clean, affordable electricity.

The UK government is undertaking its biggest overhaul of the energy sector in decades. With oil and gas supplies declining, energy prices are set to rise considerably over the next five years.

The Energy Bill currently passing through the UK parliament aims to develop a framework to increase investment and develop more sustainable, low-carbon energy. Companies are also coming under pressure to reduce their energy consumption fast or face being “taxed out of business”, according to Andrew Buckley, director general of the Major Energy Users’ Council (MEUC).

A quarter of the UK’s power generating capacity (old coal and nuclear stations) will be shutting down over the next 10 years, and demand for electricity is set to double by 2050. The government’s Electricity Market Reform, which is part of Bill, aims to deliver a secure supply of clean and affordable electricity.

Measures include ‘contracts for difference’ – where suppliers will pay the buyer the difference if prices fluctuate during the length of a contract – and subsidies such as feed-in-tariffs are included to provide incentives for companies to invest in low-carbon generation.

For buyers, the problem is that the length of time these reforms are taking to become reality is creating uncertainty. There are fears tariffs for investing in renewable energy will fall over time, as has happened with photovoltaic (PV) panels, making expensive, long-term investments less worthwhile.

Four years ago, construction company Saint-Gobain invested money into building an on-site generator to burn cooking oil to produce electricity and heat. Linda Burgess, energy purchasing manager at Saint-Gobain UK, says: “The amount of red tape encountered along the way and the difficulties with planning permission meant the project became too time-consuming and ended up being shelved.”

She adds that her role as an energy buyer has completely changed and she now spends a lot of her time trying to understand government regulations on renewable energy. “Companies make investments based on economics. Without any certainty, they become paralysed by indecision,” she says.

Thames Water spends £90 million on electricity and the company has installed several on-site generators to tackle rising costs, including anaerobic digestion. Methane gas, a by-product of the treatment of sewage water, is burned to provide 90 per cent of Thames Water’s electricity demand. The company also has PV installed at 41 sites and is in the middle of the planning process for two wind turbines.

“Trying to get my board to commit to a renewable scheme is difficult when the government keeps changing the goalposts,” says head of energy and carbon management John Gilbert. “The government needs to simplify the regulations on installing renewable systems because at the moment it’s taking too long and is extremely complicated.”

Gilbert fears the governments’ regulated costs, such as taxes on electricity, are going to rise steeply over the coming years. He has also noticed caution by energy providers. “In the past year, fewer energy suppliers have been willing to sell energy for future use, fearing they will miss out on the higher prices.” But despite this, “there are huge opportunities for organisations to use their purchasing power to source renewable energy,” according to James Close, partner for sustainability at Ernst & Young.

There can be short-term pay-back from basic measures, such as timing switches on lights, and other solutions such as PV or biomass generators have long-term returns. Close admits organisations are restricted with on-site generation, and says it is possible to get better returns through investing in off-site generation such as wind farms if you can negotiate a good deal.

Before businesses can start making these decisions, they need to assess what proportion of their energy consumption needs to be renewable. This responsibility falls on a combination of buyers, finance and sustainability staff. “What we are seeing is a greater sense of integration with procurement across companies,” says Close. “For energy buyers, it is no longer simply about negotiating with suppliers – it’s working out which strategies will work best and making clever, long-term investments.”

Many businesses are doing this successfully. BT is continuing its plans to produce 25 per cent of its current renewable electricity needs by 2016, having invested £250 million into on-shore wind farms in 2007. Richard Tarboton, director of energy and carbon at BT, says: “As well as investing in energy-efficient-control technologies in our buildings, we now have 2,200 buildings connected to our smart energy control platform, which is saving us £13 million a year.”

Another option for buyers is to introduce ‘power purchase agreements’ into their procurement strategy, where the buyer negotiates directly with an independent generator, rather than a large supplier. This can offer a more attractive price and has other benefits, such as contributing to a company’s corporate social responsibility efforts. Another popular strategy is where companies change the time of day when they use their energy to take advantage of cheaper rates.

When it comes to tackling the shortage of supply, one option is to take advantage of the UK’s reserves of shale gas. A recent report from the Institute of Directors revealed the UK has far more shale gas than first thought, enough to meet 10 per cent of the UK’s gas demand for the next 103 years.

Speaking at last month’s Energy Event in Birmingham, Tony Corruthers, commercial director of gas exploration and production firm Cuadrilla, said: “Society has evolved, so must industry. We are about to drill a fourth well in Lancashire and the amount of gas we could produce from there is immense.”

But controversy surrounding the extraction of shale gas means the firm has put some of its work on hold and has been waiting more than a year for approval from the Department of Energy and Climate Change.

MEUC advice for buyers is to be innovative and work with suppliers. It said by sharing ideas with other companies, it is possible to work around the red tape inflicted by government policies.

And while these issues may have forced buyers to change the way they work, it seems to have opened a gap for procurement to play an integral part in how businesses proceed.

Getting to grips with energy buying

Eddie Proffitt, chairman of the gas and carbon groups on the MEUC, gives his top tips for buyers:

● Fully understand what your company’s energy demand pattern is and collect data.

● Make your business attractive to suppliers. If you can show you have a flat profile throughout the year (for example, don’t peak more in the winter than in summer) a supplier can match your profile and you will get a lower offer.

● Prove you are reliable payers. If you can do this, you are in a position to negotiate discounts by paying early.

● Ask the supplier to separate out the various carbon taxes including feed-in-tariffs, to see how much will be added on to your bill. Tax will differ depending on the supplier, so look for the best offer.

● Go early to market for quotations. There is a fixed period of notice once you have signed a contract.

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