Sustainability: energy procurement

The rising tide of energy bills

These days, the task of energy procurement is becoming increasingly critical as users struggle against relentlessly rising costs. Adrian Newton, event director of Energy Solutions, discusses ways in which to tackle the challenge head-on.

 

The spiralling price of energy in recent years has turned from a headache into a full-blown migraine for many UK organisations across both the public and private sectors. Indeed, with the expected increase to even higher prices, driven by volatility of the global market, the health of an organisation’s balance sheet, not to mention its ethical reputation, may well be determined by its expenditure on energy in the decade ahead. In short, the pain is set to continue.

The good news is that there are ‘over the counter’ purchasing solutions that an organisation can take to alleviate the discomfort. By adopting a creative energy procurement strategy, organisations can save a significant sum that may represent the difference between insolvency and survival.

The journey to a manageable purchasing plan has two routes. Either the organisation produces less carbon dioxide emissions or it charts a safer passage through the choppy waters of market volatility.

The first option—reduction of the overall carbon footprint—is not only attractive for the environmental conscience of an organisation, but it can result in considerable savings. The coalition government appears to have picked up the baton from the previous administration’s decarbonisation policies and the target of a 34 per cent reduction in greenhouse gases by 2022 is still on. If successful, by 2030, electricity production in the UK will be virtually carbon-free.

Energy saving measures are the most obvious means of reducing the electricity bill—use less and you pay less. But of the energy procurement options available to organisations, the most appealing on paper is microgeneration. Through renewable energy, deploying the earth’s natural resources to create ‘free’ energy, an organisation will also receive ‘feed-in tariffs’ from the government, which mean it could end up making money from energy. What a pleasant thought! Solar power, wind power, anaerobic digestion, biomass heating, heat pumps—they all represent a means to reduce bills and the carbon footprint.

The problem, of course, is that they are not free. Indeed, they require considerable upfront investment, which many organisations cannot consider in the current economic climate. However, with fast-improving technical innovations in renewable energy production, who knows what the options will be in just a few years’ time? If necessity be the mother of invention, then she will know these are needy times.

But those organisations in the vast majority that are unable to establish their own energy production are not excluded from the renewables cavalcade. The green energy market supplies either ‘pure’ green energy generated by renewable sources or electricity from traditional fossil-fuels offset against energy ‘returned’ to the National Grid from renewables. Other green tariffs will provide old-fashioned carbon-generated energy, but make regular contributions to environmental projects and technical innovation schemes as a pay-off. These ‘ecotricity’ measures will eventually increase the supply of renewables, which will push the price down.

Despite the tragedy at the Fukushima Daiichi power plant following this year’s tsunami in Japan, nuclear-generated power remains an important component of the global energy-production blueprint, while carbon sequestration—its capture and storage—may increase in importance as methods improve.

The green market is every bit as competitive as the traditional electricity market, with any number of suppliers chasing the same contract, so there are attractive and less attractive deals to be found. Organisations may choose to stick to the traditional fossil-fuels market, trusting sound business judgement to achieve a purchasing rate that will allow them to operate advantageously. The good thing about a volatile market is that it goes down as well as up, so if your timing is spot-on, your bottom line will be less afflicted.

Market-testing an existing energy contract against the many choices available in the market can result in considerable savings. However, determining the best way in which your energy is purchased—most likely within the two primary options of fixed or flexible contracts—demands good fortune or insight. If an organisation is not willing to surrender to the former and has no in-house expertise, then employment of a consultant with the requisite knowledge of pricing and contractual arrangements is a wise course of action. These professionals will attempt to answer the key questions of when to buy, what to buy and for how long, according to their clients’ risk profile.

The ideal result is to secure a long-term contract fixed at the bottom of the market. The forecast is for higher prices and continued volatility, so snaring an advantageous rate in the long term would be a boon. The chances of regretting the price dropping is much less likely to happen than cursing your luck as the graph spikes. On the other hand, the right flexible contract can allow the savvy company to buy for an extended forward period, but gives time to react if the market bucks the gloomy predictions.

With the deadline for this year’s mandatory CRC Energy Efficiency Scheme fast approaching, the carbon footprints of large public and commercial organisations are about to be put under the microscope by the Environment Agency. The administrators and politicians are keen to stress the attractive savings to be earned from long-term energy efficiency and the financial rewards that await do-gooders. But there is a weighty stick behind the carrot: those organisations that fare badly in the performance league tables can expect to be publically named and shamed.

Non-compliance may result in enforcement measures, but the reputational damage will smart more than any punishments. Likewise, organisations that score highly, markedly reducing their carbon footprints, may enjoy an improved relationship with consumers, clients or Whitehall. The sooner the big players see a link between CRC performance league tables and their bottom line, the faster the scheme will rise up the agenda.

These are important years ahead, which will go a long way towards defining energy procurement in the UK for the considerable future. If you can predict what will happen over the next 10 years, then there’s a fortune to be made. Good luck to you! But for those of us who cannot, then at least there are means to manage the very real risks that lie in wait for the ill-prepared.

Covering energy procurement, energy management, efficiency and onsite renewables, Energy Solutions from 11-12 October 2011 at London Olympiais widely regarded as the UK’s leading energy event. The exhibition attracts energy users from all over the UK looking to source advice, education, products and services to help shape their organisations, energy strategy and ultimately, become more sustainable, renewable and carbon efficient. For more information go to www.energysolutionsexpo.co.uk