E.ON’s Phil Gilbert, Director of Energy Solutions, E.ON
If a business's energy strategy for 2018 remains simply getting a cheaper unit rate, it is focusing on the wrong area. The bigger emphasis needs to be on managing overall costs - that means the volume of energy you consume rather than the simpler pence-per-unit.
The reason for this change in focus is the upward trend of third party costs as a proportion of a total energy bill. When looking at a business energy bill, the non-energy costs have increased significantly in recent years – and that trend shows no sign of stopping – shooting up from 33% of the bill in 2010 to 55% in 2017. In E.ON’s recent submission to the Helm Review into the energy market, our forecast was for third party costs to make up around 67% of the bill by 2021.
And whilst we can’t do much to influence the wholesale market price of energy, there is much we can do to help businesses use less in the first place, helping them understand, control and manage the cost of their energy use over the long term.
Because a detailed energy strategy can help in many ways; from lower operating costs and higher employee productivity, to better buildings, greater resilience and lower risk. The coming year represents a real opportunity for businesses to think differently about energy and integrate it more deeply into their strategic plans rather than only day-to-day operations.
Contributing to rising third party costs are distribution and transmission network costs, which currently make up around 27% of a typical energy bill. These costs have increased as customers are required to finance infrastructure upgrades to support new low carbon generation. Government environmental programmes also contribute – as they are collected through bills and not taxes - and policy costs have represented an increasing proportion of the final electricity bill in recent years.
The costs association with Electricity Market Reform – such as Capacity Market costs and Contracts for Difference – are another contributing factor. While the use of competitive auctions to procure new renewable technologies has already helped to reduce the level of support required compared to previous schemes, there are a number of aspects which need reviewing to ensure these costs do not become too great a burden on customers.
Clearly there are other components that make up a business’s final bill but it does make plain the increasing impact of third party costs on energy bills. It has therefore never been more important for businesses to drive down their energy use through efficiency measures and behaviours, and smart solutions.
In a time of uncertain and rising third party costs, a fixed price contract can offer obvious benefits to a business. To go back to the opening point, what is really key in 2018 is taking a more strategic look at your energy use. Cutting down waste, using smart technologies to manage buildings and the equipment within them, and possibly generating your own power, or capturing opportunities to reduce demand and sell that flexibility back to the grid, are all options to consider, and E.ON can help throughout the whole process from concept to management.
Energy is complicated. It takes real expertise to understand the opportunities and manage them in the best way. Energy legislation can be a minefield and a drag on resources, and Government priorities and the legislation and policy that delivers them often seem to change with prevailing politics. In this environment, business action on energy can often get reduced to the straightforward negotiation on price, rather than a strategic investment discussion on total energy costs at a board level where these kinds of decision can be signed off.
Steps to success
At E.ON, we see three key stages in a business customer’s journey to optimum energy usage.
The first is simply choosing an energy contract based on 'getting the right price' but without looking in great detail at ways to minimise costs.
The second stage is to formally consider the potential savings from energy efficiency, through the use of low-energy lighting or intelligently switching off heavy plant when not in use. These investments do not involve large capital outlays and have short payback periods. The final stage is a complete move from smaller-scale energy efficiencies towards a strategic approach to energy.
This final stage is where the greatest impact can be felt. Greater control of the energy a business uses gives it scope to price more competitively and diminishes the risk of market fluctuations in energy price needing to be passed straight to its customers. Combined heat and power plants and waste-heat recovery equipment reduce maintenance and material demands, while providing energy for the business – plus extra to be sold on for profit.
Of course, not every business can afford the capital outlays that such a change could demand - even if they do pay for themselves in the long run. But with such a wide array of benefits on offer, beginning even a small audit in your business is anything but a waste of energy.