Energy Procurement 2013/14

Transcript of Energy Procurement 2013/14

2013/14

Published by
The energy behind UK business

Energy is the driving force behind every business. Having supplied companies across the UK for over 10 years,GDF SUEZ Energy UK understands how to make your energy contract work for you. As part of the worlds largest utility company, we have the resources to provide the support you need and were constantly innovating and evolving to keep your business one step ahead.

Trust your energy to the business specialists call 0113 306 2078 or visit www.gdfsuez-energy.co.uk
The energy behind UK business

Energy is the driving force behind every business. Having supplied companies across the UK for over 10 years,GDF SUEZ Energy UK understands how to make your energy contract work for you. As part of the worlds largest utility company, we have the resources to provide the support you need and were constantly innovating and evolving to keep your business one step ahead.

Trust your energy to the business specialists call 0113 306 2078 or visit www.gdfsuez-energy.co.uk

CONTENTS3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4Tim McManan-Smith, editor, Energy Procurement

The Energy Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Janet Wood, editor, New Power magazine

Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . .14Steven Fawkes, freelance journalist

Case Study: Arsenal FC . . . . . . . . . . . . . . . . . . . . .17

Energy Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Andrew Buckley, director general, The Major Energy Users Council

Viewpoint: Collaboration is Key . . . . . . . . . . . . .22David Hall, head of sales, GDF SUEZ Energy UK

The Cost of Generation . . . . . . . . . . . . . . . . . . . .24Alex Trembath, Jessica Lovering, Max Luke, The Breakthrough Institute

Energy Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Ian Vallely, freelance journalist

Viewpoint: Electricity Market Reform . . . . . . . .34Wayne Mitchell, industrial and commercial sales and marketing directornpower

Energy Intensive Industries . . . . . . . . . . . . . . . . .37Jeremy Nicholson, Energy Intensive Users Group

Procurement Best Practice . . . . . . . . . . . . . . . . .42David Noble, CEO, The Chartered Institute of Purchasing & Supply

Viewpoint: Risk Management . . . . . . . . . . . . . . .45Ben Dhesi, head of energy management, Pulse Commercial Utilities

Carbon Capture & Storage . . . . . . . . . . . . . . . . .48Judith Shapiro, policy and communications manager, The Carbon Capture& Storage Association

Case Study: Holland & Barrett . . . . . . . . . . . . . . .52

Sustainable Procurement . . . . . . . . . . . . . . . . . . .54Andrew Jones CEng FEI BEng MCIBSE, director, EAV Associates

Energy Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58Matt Smith, commodity analyst, Schneider Electric

Attitudes to Energy . . . . . . . . . . . . . . . . . . . . . . . .64Deepika Swamy, energy communications consultant, CadenceFisher

Technical Information . . . . . . . . . . . . . . . . . . . . .74Maps detailing UK Electricity Supply, and Europe & CIS Gas Supplies and an Energy Conversion Table

Editor Tim McManan-SmithTel: 07818 574308 [email protected]

Sales Director Steve SwaineTel: 07818 574300 [email protected]

i2i Events GroupThe Studios, 2 Kingdom Street, London, W2 6JGRegistered at Stationers Hall ISSN 0964 8321Printed by Headley Brothers

Disclaimer: Opinions expressed by individual contributors may not necessarily be those held bythe publisher. Although every effort has been made to ensure the accuracy of informationpublished this should be used at the readers discretion.

The Maps within this publication are supplied courtesy of: The Petroleum Economist Limited(www.petroleum-economist.com)
Runningan energy procurement department for has always beencomplex and the energy bill will add to that. The need to act swiftlyhas never been greater if we are tobe prepared and to make sure were noton the road to nowhere

Purchasing energy has never been an easy task with a highlyvolatile wholesale market and various charges that do notremain fixed. With electricity you have transmission anddistributions charges, VAT, the climate change levy, the carbon floorprice will add to generators costs and be passed through to theconsumer, some are in the EU emissions trading scheme whichputs a price on carbon use, some are in the CRC energy efficiencyscheme which again taxes carbon use. Therenewables obligation(soon to be contracts for difference which would also aid nucleargeneration) adds to generators costs as do schemes such as Feed-in-Tariffs and the Renewable Heat Incentive. Gas is certainly simplerto understand, it is affected by all of the taxes on carbon and thereare also incentives around to incentivise shale gas development butit also seems to be more volatile than electricity. There are anumber of ways around the problem of procuring energy, one is thetraditional method of ignoring it, paying whatever your incumbentsupplier says the bill costs and most likely fixing the price so as tohave certainty. This can be the right thing to do but it would involvean enormous slice of luck to make it so.As with many of the taxes mentioned above carbon reduction is a

key area of taxation with the Government wishing to not just hit itslegally binding targets but to lead the world in the push towards a lowcarbon economy. It is this focus that has led many major energy usersto look again at reducing energy consumption. Energy efficiencyhas always been accepted as a low cost method of carbon reductionand if nothing else it lowers energy bills for the consumer and helpssecurity of supply by reducing demand. (Stephen Fawkes, p14)In addition to a comprehensive audit of where energy is being used

by your organization and how it may be possible to reduce it whetherthat is behavioural change of employees, technology changes or bettermaintenance, what else can be done to aid energy management?

Demand response is certainly something that should be looked atwith its ability to yield large sums of money for load shedding or eventurning on generation capacity at times when the grid is stretched.The timing of when you use energy can lead to cost saving withoutand change in the total load profile of energy. Triad management isanother essential area that can be managed in-house or morecommonly by a broker, consultant or demand response aggregator. The other area is that is the core of this publication which is to

buy more wisely; easier said than done. Drivers in the primary fuelmarkets are often conflicting, for instance the glut of gas in the USthrough the discovery and exploitation of it shale gas reservesshould depress the global market. The US is no longer an importerof LNG which should make it cheaper to import into the UK.However, gas prices have gone up for the majority of businesses(and homeowners also). Why is this? We have has a couple of coldwinter in a row which has put pressures on reserves (such as theyare) and this has to be replenished in the summer months. Post-Fukishima Japan has had to plug its nuclear power gap with LNG,North Sea gas is declining; supplying less than 40% of the UKsdemand from being an exporter 10 years ago. Maybe its none of those things directly but the fact remains that

prices have risen. Electricity within the UK is even morecomplicated due to the diversity of supply and policy complexity.The charm of risk management has always been that it doesnt lookat the drivers it merely responds to the numbers and a consumersappetite for risk. You are able to make intelligent decisions basedon the wholesale numbers rather than needing a trueunderstanding of all of the complex variables. Having said that,some knowledge of the fundamentals will enable a broader view ofwhere the market is headed in the long run and how to address acompanys complete energy policy from legislation and taxation to

INTRODUCTION4

continued on page 6

INTRODUCTION5

"Well, in our country," said Alice, still panting a little, "you'd generally get tosomewhere else if you run very fast for a long time, as we've been doing.""A slow sort of country!" said the Queen. "Now, here, you see, it takes all therunning you can do, to keep in the same place. If you want to get somewhereelse, you must run at least twice as fast as that!"
Runningan energy procurement department for has always beencomplex and the energy bill will add to that. The need to act swiftlyhas never been greater if we are tobe prepared and to make sure were noton the road to nowhere

Purchasing energy has never been an easy task with a highlyvolatile wholesale market and various charges that do notremain fixed. With electricity you have transmission anddistributions charges, VAT, the climate change levy, the carbon floorprice will add to generators costs and be passed through to theconsumer, some are in the EU emissions trading scheme whichputs a price on carbon use, some are in the CRC energy efficiencyscheme which again taxes carbon use. Therenewables obligation(soon to be contracts for difference which would also aid nucleargeneration) adds to generators costs as do schemes such as Feed-in-Tariffs and the Renewable Heat Incentive. Gas is certainly simplerto understand, it is affected by all of the taxes on carbon and thereare also incentives around to incentivise shale gas development butit also seems to be more volatile than electricity. There are anumber of ways around the problem of procuring energy, one is thetraditional method of ignoring it, paying whatever your incumbentsupplier says the bill costs and most likely fixing the price so as tohave certainty. This can be the right thing to do but it would involvean enormous slice of luck to make it so.As with many of the taxes mentioned above carbon reduction is a

key area of taxation with the Government wishing to not just hit itslegally binding targets but to lead the world in the push towards a lowcarbon economy. It is this focus that has led many major energy usersto look again at reducing energy consumption. Energy efficiencyhas always been accepted as a low cost method of carbon reductionand if nothing else it lowers energy bills for the consumer and helpssecurity of supply by reducing demand. (Stephen Fawkes, p14)In addition to a comprehensive audit of where energy is being used

by your organization and how it may be possible to reduce it whetherthat is behavioural change of employees, technology changes or bettermaintenance, what else can be done to aid energy management?

Demand response is certainly something that should be looked atwith its ability to yield large sums of money for load shedding or eventurning on generation capacity at times when the grid is stretched.The timing of when you use energy can lead to cost saving withoutand change in the total load profile of energy. Triad management isanother essential area that can be managed in-house or morecommonly by a broker, consultant or demand response aggregator. The other area is that is the core of this publication which is to

buy more wisely; easier said than done. Drivers in the primary fuelmarkets are often conflicting, for instance the glut of gas in the USthrough the discovery and exploitation of it shale gas reservesshould depress the global market. The US is no longer an importerof LNG which should make it cheaper to import into the UK.However, gas prices have gone up for the majority of businesses(and homeowners also). Why is this? We have has a couple of coldwinter in a row which has put pressures on reserves (such as theyare) and this has to be replenished in the summer months. Post-Fukishima Japan has had to plug its nuclear power gap with LNG,North Sea gas is declining; supplying less than 40% of the UKsdemand from being an exporter 10 years ago. Maybe its none of those things directly but the fact remains that

prices have risen. Electricity within the UK is even morecomplicated due to the diversity of supply and policy complexity.The charm of risk management has always been that it doesnt lookat the drivers it merely responds to the numbers and a consumersappetite for risk. You are able to make intelligent decisions basedon the wholesale numbers rather than needing a trueunderstanding of all of the complex variables. Having said that,some knowledge of the fundamentals will enable a broader view ofwhere the market is headed in the long run and how to address acompanys complete energy policy from legislation and taxation to

INTRODUCTION4

continued on page 6

INTRODUCTION5

"Well, in our country," said Alice, still panting a little, "you'd generally get tosomewhere else if you run very fast for a long time, as we've been doing.""A slow sort of country!" said the Queen. "Now, here, you see, it takes all therunning you can do, to keep in the same place. If you want to get somewhereelse, you must run at least twice as fast as that!"
energy purchasing and demand side management. There is a great deal of jockeying for position at the moment by

groups with vested interests in getting the government to design anenergy policy that would be favourable to them. When the article onpage 24 that compares nuclear power with renewable power waspublished on its own website (The Breakthrough Institute) in the USthere was an outcry that the data had been cherry-picked. Indeed ithad, even though it showed that nuclear power was four timescheaper than renewable energy they looked at the most expensivenuclear power station ever built, the Olkiluoto plant in Finlandwhich is a new design and would come down in price if rolled outfurther, with the German solar model, the worlds most advancedapplication of solar energy. The third and fourth versions of thisreactor being built in China will be a third of the cost meaning thatit would work out 12 times cheaper than the German solar model.For a few hours one day last year itproduced 50% of the countrys powerneeds yet overall for 2012 it was 5%.Yet without finding the figures we arejust arguing passionately without thefacts. Large scale renewable generationis certainly part of the solution andcan definitely be used to great effect byindividual companies onsite. If climate change is to be addressed

while keeping the lights on we need abroad mix of technologies that complement each other, the legislationshould be technology agnostic and there should be no picking winnersby politicians. Nuclear power has its problems and that is chiefly costs,even after Fukishima safety is no really an issue. The World HealthOrganization has issued a report that suggest that 1.2% of peopleexposed to the highest dose will develop cancer over their lifetime,compared to the whole population figure of 35% Japanese. WHOestimated 51 of the 23,000 workers assigned to clear up the plant mayget cancer, hardly the suicide mission we were led to believe it was.While any loss of human life is a bad thing what the renewablepush and nuclear closure in Germany has meant is that there is nowmore fossil fuels on the grid and particularly coal due to its low cost atpresent. This is needed to plug the intermittency and provide baseloadthat the nuclear plants would have done. NASA climate scientist JamesHansen has estimated that commercial nuclear power plants havesaved a net total of 1.8 million lives by reducing fossil fuel pollution.

As ever with UK energy policy is not so much what we are doingbut what we are not doing. No carbon capture and storage has beentested yet and there will only be one on test by 2020. No nuclear powerplants are being built. Renewable energy is coming along but there hasbeen little implementation in the way of storage which would reallyget over any intermittency worries. Demand response if growing butagain at nowhere near the pace required to deal with intermittencycreated by renewable energy developments. Ofgem says that Marginsare projected to fall from 14% in 2012/13 to 4% in 2015/16. For acomparison Sizewell B produces 3% of the UKs power and Drax 7%.So if one of those goes down (Drax is not actually one plant so this isunlikely) then blackouts are imminent. I am sure that these will beavoided but the only way out is through outbidding everybody elseglobally for LNG, coal and using all of our interconnectors to themaximum. Not a situation that we want to happen. So we need to

get going, although there may yet betime for one more review, amendmentor clarification document.All of this is reminiscent of The Red

Queens race in Lewis Carrolls Throughthe Looking-Glass that involves the RedQueen and Alice constantly runningbut remaining in the same spot.Well, in our country, said Alice,

still panting a little, youd generallyget to somewhere else if you run

very fast for a long time, as weve been doing.A slow sort of country! said the Queen. Now, here, you see, it

takes all the running you can do, to keep in the same place. If youwant to get somewhere else, you must run at least twice as fast as that!A book for children that could help UK Government policy? The

cycle of constant talk for urgency then nothing much actuallyhappening has to be broken now.

Tim McManan-SmithEditorEnergy [email protected]

INTRODUCTION6

As ever with UK energy policy is not somuch what we are doing but what weare not doing. No carbon capture andstorage has been tested yet and therewill only be one on test by 2020. Nonuclear power plants are being built.

continued from page 4

[email protected]

* Functionality launching in September

Follow us on Twitter@npowerbusiness

Risk Navigator is npowers industry-leading market intelligence and risk management tool. An interactive online portal provides all the key information you need to buy or sell energy effectively, presented in an easy-to-use and secure dashboard format thats personalised for your individual requirements.

When youre buying energy, knowledge is power

The best way to stay informedWith Risk Navigator, you can:

Keep track of important market news as it breaks.

Monitor wholesale energy prices via a range of parameters.

View detailed data and analysis of your businesss energy portfolio, if buying via exible contract.

Set price alerts with email notication.

Calculate your overall position with functionality that allows you to enter multiple trade scenarios to get an idea of potential cost and outcome before you act.*

Manage business energy risk, utilising your own customer-specic reports.

Risk Navigator is part of npowers award-winning Optimisation Desk service for exible contract customers. You can nd out more, including how to set up a free trial, by contacting

When you need energy knowledge without information overload, Risk Navigator is the answer.

npower.com/RiskNavigator

Risk Navigator
energy purchasing and demand side management. There is a great deal of jockeying for position at the moment by

groups with vested interests in getting the government to design anenergy policy that would be favourable to them. When the article onpage 24 that compares nuclear power with renewable power waspublished on its own website (The Breakthrough Institute) in the USthere was an outcry that the data had been cherry-picked. Indeed ithad, even though it showed that nuclear power was four timescheaper than renewable energy they looked at the most expensivenuclear power station ever built, the Olkiluoto plant in Finlandwhich is a new design and would come down in price if rolled outfurther, with the German solar model, the worlds most advancedapplication of solar energy. The third and fourth versions of thisreactor being built in China will be a third of the cost meaning thatit would work out 12 times cheaper than the German solar model.For a few hours one day last year itproduced 50% of the countrys powerneeds yet overall for 2012 it was 5%.Yet without finding the figures we arejust arguing passionately without thefacts. Large scale renewable generationis certainly part of the solution andcan definitely be used to great effect byindividual companies onsite. If climate change is to be addressed

while keeping the lights on we need abroad mix of technologies that complement each other, the legislationshould be technology agnostic and there should be no picking winnersby politicians. Nuclear power has its problems and that is chiefly costs,even after Fukishima safety is no really an issue. The World HealthOrganization has issued a report that suggest that 1.2% of peopleexposed to the highest dose will develop cancer over their lifetime,compared to the whole population figure of 35% Japanese. WHOestimated 51 of the 23,000 workers assigned to clear up the plant mayget cancer, hardly the suicide mission we were led to believe it was.While any loss of human life is a bad thing what the renewablepush and nuclear closure in Germany has meant is that there is nowmore fossil fuels on the grid and particularly coal due to its low cost atpresent. This is needed to plug the intermittency and provide baseloadthat the nuclear plants would have done. NASA climate scientist JamesHansen has estimated that commercial nuclear power plants havesaved a net total of 1.8 million lives by reducing fossil fuel pollution.

As ever with UK energy policy is not so much what we are doingbut what we are not doing. No carbon capture and storage has beentested yet and there will only be one on test by 2020. No nuclear powerplants are being built. Renewable energy is coming along but there hasbeen little implementation in the way of storage which would reallyget over any intermittency worries. Demand response if growing butagain at nowhere near the pace required to deal with intermittencycreated by renewable energy developments. Ofgem says that Marginsare projected to fall from 14% in 2012/13 to 4% in 2015/16. For acomparison Sizewell B produces 3% of the UKs power and Drax 7%.So if one of those goes down (Drax is not actually one plant so this isunlikely) then blackouts are imminent. I am sure that these will beavoided but the only way out is through outbidding everybody elseglobally for LNG, coal and using all of our interconnectors to themaximum. Not a situation that we want to happen. So we need to

get going, although there may yet betime for one more review, amendmentor clarification document.All of this is reminiscent of The Red

Queens race in Lewis Carrolls Throughthe Looking-Glass that involves the RedQueen and Alice constantly runningbut remaining in the same spot.Well, in our country, said Alice,

still panting a little, youd generallyget to somewhere else if you run

very fast for a long time, as weve been doing.A slow sort of country! said the Queen. Now, here, you see, it

takes all the running you can do, to keep in the same place. If youwant to get somewhere else, you must run at least twice as fast as that!A book for children that could help UK Government policy? The

cycle of constant talk for urgency then nothing much actuallyhappening has to be broken now.

Tim McManan-SmithEditorEnergy [email protected]

INTRODUCTION6

As ever with UK energy policy is not somuch what we are doing but what weare not doing. No carbon capture andstorage has been tested yet and therewill only be one on test by 2020. Nonuclear power plants are being built.


[email protected]

* Functionality launching in September

Follow us on Twitter@npowerbusiness

Risk Navigator is npowers industry-leading market intelligence and risk management tool. An interactive online portal provides all the key information you need to buy or sell energy effectively, presented in an easy-to-use and secure dashboard format thats personalised for your individual requirements.

When youre buying energy, knowledge is power

The best way to stay informedWith Risk Navigator, you can:

Keep track of important market news as it breaks.

Monitor wholesale energy prices via a range of parameters.

View detailed data and analysis of your businesss energy portfolio, if buying via exible contract.

Set price alerts with email notication.

Calculate your overall position with functionality that allows you to enter multiple trade scenarios to get an idea of potential cost and outcome before you act.*

Manage business energy risk, utilising your own customer-specic reports.

Risk Navigator is part of npowers award-winning Optimisation Desk service for exible contract customers. You can nd out more, including how to set up a free trial, by contacting

When you need energy knowledge without information overload, Risk Navigator is the answer.

npower.com/RiskNavigator

Risk Navigator
The EnergyBill has a lot of objectives to meet, but security ofsupply always comes out in the lead. That means prices will go up but

supplies should be secure in the long term. Janet Wood examined the

Bills implications for business customers

The new energy bill has a multitude of problems tosolve. The government talks about the energytrilemma: balancing three imperatives of energypolicy affordability for domestic and business customers,security of supply and decarbonisation that are often inopposition. But thats not the only issue to grapple with. The UK has been sweating its energy industry, relying on

power plants that were built in the 1970s that are now reachingthe end of their lives, or in some cases must be closed to meetpollution control directives. That requires huge investment at atime when we are still trying to lift ourselves out of the lingeringfinancial crisis and recession and new investors; as the utilitieswho would otherwise have funded new plants have been hard-hit by the economic downturn.Our high use of fossil fuels is also beginning to come under

pressure. This year around 60% of our power has come fromcoal or gas-fired stations, because we were able to takeadvantage of low priced coal from a world oversupply, and wewere able to import gas as well as using the North Sea reservesthat have been our mainstay for many years. But this year has been an anomaly in a story in which our

own fossil resources are dwindling and we have to findreplacements. Although that narrative has been disrupted bythe discovery of huge shale gas resources that could potentiallybe extracted and used, the underlying issues remain the same and for some in the industry taking fossil fuels from theequation is a key part of meeting the security part of thetrilemma. There are limited fossil fuels available that can beextracted at a reasonable price and we are competing in a globalmarket and may pay high prices to secure them. It is also worthremembering that we will be at an economic advantage if we do

not use our own fossil resources domestically, as then we can besellers in the global market. The government decided many years ago that one way to

address these issues was to drive investment towards low-carbonpower sources a choice that also addressed the issue of tryingto limit climate change. Can a single Energy Bill solve all these problems, many of

them outside the control of the UK? Thats unlikely and it iscertainly impossible that it will be able to achieve its goalswithout higher energy bills. The fact is that energy prices arerising worldwide, and in broad terms they will continue to doso. The Energy Bill will not change that, because in thetrilemma, security of supply is always the most important of thethree aims. Government does not claim that prices will not rise;its aim is to take the route that limits the increase while securingthe right type of supplies.Although there has been debate on some of the Energy Bills

detail, in the main its measures have support from across thepolitical spectrum because it will secure supplies at a price for the long term. That consensus has been reinforced by recentnews that our energy supplies will be very tight in the nextcouple of years and special measures will be needed. The policies behind the bill are unlikely to change, even if

there is a change of government at the next election, and eventhe most dramatic political announcements are unlikely to alterfundamentally the bills major new delivery mechanisms.Businesses considering their own energy strategies should workon that basis.

The cost of carbonThe government has three major policy levers in the energy

THE ENERGY BILL8

continued on page 10

THE ENERGY BILL9
The EnergyBill has a lot of objectives to meet, but security ofsupply always comes out in the lead. That means prices will go up but

supplies should be secure in the long term. Janet Wood examined the

Bills implications for business customers

The new energy bill has a multitude of problems tosolve. The government talks about the energytrilemma: balancing three imperatives of energypolicy affordability for domestic and business customers,security of supply and decarbonisation that are often inopposition. But thats not the only issue to grapple with. The UK has been sweating its energy industry, relying on

power plants that were built in the 1970s that are now reachingthe end of their lives, or in some cases must be closed to meetpollution control directives. That requires huge investment at atime when we are still trying to lift ourselves out of the lingeringfinancial crisis and recession and new investors; as the utilitieswho would otherwise have funded new plants have been hard-hit by the economic downturn.Our high use of fossil fuels is also beginning to come under

pressure. This year around 60% of our power has come fromcoal or gas-fired stations, because we were able to takeadvantage of low priced coal from a world oversupply, and wewere able to import gas as well as using the North Sea reservesthat have been our mainstay for many years. But this year has been an anomaly in a story in which our

own fossil resources are dwindling and we have to findreplacements. Although that narrative has been disrupted bythe discovery of huge shale gas resources that could potentiallybe extracted and used, the underlying issues remain the same and for some in the industry taking fossil fuels from theequation is a key part of meeting the security part of thetrilemma. There are limited fossil fuels available that can beextracted at a reasonable price and we are competing in a globalmarket and may pay high prices to secure them. It is also worthremembering that we will be at an economic advantage if we do

not use our own fossil resources domestically, as then we can besellers in the global market. The government decided many years ago that one way to

address these issues was to drive investment towards low-carbonpower sources a choice that also addressed the issue of tryingto limit climate change. Can a single Energy Bill solve all these problems, many of

them outside the control of the UK? Thats unlikely and it iscertainly impossible that it will be able to achieve its goalswithout higher energy bills. The fact is that energy prices arerising worldwide, and in broad terms they will continue to doso. The Energy Bill will not change that, because in thetrilemma, security of supply is always the most important of thethree aims. Government does not claim that prices will not rise;its aim is to take the route that limits the increase while securingthe right type of supplies.Although there has been debate on some of the Energy Bills

detail, in the main its measures have support from across thepolitical spectrum because it will secure supplies at a price for the long term. That consensus has been reinforced by recentnews that our energy supplies will be very tight in the nextcouple of years and special measures will be needed. The policies behind the bill are unlikely to change, even if

there is a change of government at the next election, and eventhe most dramatic political announcements are unlikely to alterfundamentally the bills major new delivery mechanisms.Businesses considering their own energy strategies should workon that basis.

The cost of carbonThe government has three major policy levers in the energy

THE ENERGY BILL8


THE ENERGY BILL9
bill that are intended to support the three headline policy goalsof affordability, security and decarbonisation. They are a subsidyregime for low-carbon generating plant known as Contracts forDifference (CfD) to attract investment; plans for a capacitymarket that will ensure flexible plant (which in practice wouldbe mainly gas-fired) is available whenever it is needed; and anEmissions Performance Standard (EPS) that should make itimpossible to build plants (generally coal-fired) that emit highlevels of carbon dioxide. The EPS is likely to have the least direct effect on customers.

Before looking in detail at the other two mechanisms, it is worthconsidering some other measures that have been taken outsidethe energy bill that reinforce the governments strategy anddirectly affect energy customers.An important plank of government and international

strategy has been to try to develop a price for carbon, on theassumption that - despite being a colourless, odourless gas andone that appears in nature - it is just as much of a pollutant asother power station emissions like sulphur dioxide and the costof managing it must be attributed to the producer. That is thetheory behind the EUs Emissions Trading Scheme (ETS), whichaffects some large users directly and all customers indirectly,because it means companies including power utilities - incurcosts when they emit carbon dioxide. If the ETS worked as intended it would naturally drive

companies towards lower-carbon investments; but the price ofcarbon in the scheme is far too low to have this effect. TheBritish government has responded by setting a floor price forcarbon dioxide in Great Britain. It wants the price of carbon tostart at 16 per tonne emitted this year, to reach 30 per tonneby 2020, and 70 per tonne in 2030. If the value of carbon in theETS is below that and this year it is closer to the 4 mark emitters are charged by the government for the difference. The measure has been opposed by intensive energy users,

who say they will be incentivised to move to countries wherecarbon and therefore energy costs are lower. Thegovernment has some sympathy with that view and has offeredcompensation. The measure also puts government in the odd position of

having a policy intended to support higher carbon prices thatgives it a direct financial benefit while the carbon price stayslow, because the top-up, which could be 4 billion in the next

three years, is paid directly to the Treasury. It has also been suggested that the price support could be

short-lived. Its true that as a Treasury measure the carbon pricesupport could be removed in the coming years as easily as it wasadded (in a budget announcement), but that income stream ishard to give up. Shadow chancellor Ed Balls also gave stronghints that he would retain it in a Green Alliance meeting in July.He said that good environmental taxes incentivise the rightbehaviour by properly externalising costs, and added greentaxes that dont do anything to help the environment areparticularly perverse. But he said he wasnt in the mood to giveup tax revenues. That raises the possibility that the income from the price floor

may be allocated to improve energy efficiency and help the fuel-poor, as advocated by an alliance of consumer and green groups.But for businesses, the message is that carbon price support isprobably here to stay.

Predictable or not? Contracts for DifferenceOne merit of the carbon floor price is that it is predictable.

There is also a carrot in its design. Although it is a tax at themoment, it is in fact a contract for difference (CfD). Businessespay the top-up fee if the ETS price of carbon is below the pricefloor - but if the carbon price peaks above a price ceilinggovernment will pay the difference. That may be unlikely, but itprovides certainty of a sort.A high carbon price is one way of trying to get power

suppliers to switch to low-carbon forms of generation, but at themoment it is not enough. There are a couple of reasons. First,many low-carbon options are at a relatively early stage ofdevelopment so they are still expensive to build. Secondly, mostof their cost arises right at the start, because fuel costs are lowand the capital cost to build the plant is high. That requires aninvestor to take what could be an expensive gamble, and to takethat on the investor wants a guarantee that there will besufficient return on investment.Previously the UK government tried to manage this via the

Renewables Obligation, which required energy suppliers to use agrowing proportion of power from renewable sources or pay afine. That worked well in its original aim of bringing thecheapest renewables sources (generally landfill gas and wind)online as fast as possible. But it failed in some aspects. It had to

THE ENERGY BILL10


be refined to give bigger subsidies to less developed renewables,and as it was designed so that the target proportion ofrenewables always had unreachable headroom somegenerators made very large profits. What is more, it gave nosupport to nuclear, which the Department of Energy andClimate Change (Decc) sees as the largest low-carbongeneration option, and one that would be required to meetclimate targets. Nuclear has the same high capital cost and slowreturn problem as renewables, but multiplied many times andit is unpopular and slow to build, meaning any developer wouldhave to make a multi-year multi-billion pound commitmentyears before it sees any return.Deccs solution is the feed-in tariff with Contract for

Difference (CfD FIT) that forms the centrepiece of the bill. It isintended to provide a predictable return for investors in newgeneration and at the same time give customers somepredictability on prices. There is a strike price for each type oftechnology that Decc sees as a fair return. Generatingcompanies receive a top-up payment if the power price is belowthe strike price, and pay back the difference if the power price isabove that level. The strike price is intended to be set at a level that will tempt

investors to invest in new power projects. But in theory the

guaranteed price will also mean investors accept a somewhatlower rate of return than they would for a risky project. The CfDwill not mean prices fall. Far from it, as a glance at the strikeprices set out by Decc show (see table). But the governmenthopes they are at a level that will maintain stable prices forinvestors and users. Investors have been wary about the CfD mechanism, although

most would say that once it is in place they will work within it. It has some potential issues for customers too. Price top-ups

and repayments will be managed by a government-backedcounterparty but some important practical details of itsmethodology are unclear. For example, will the counterparty beable to hold a buffer fund of cash from one year to the next tosmooth payment levels? If it does not, businesses paying fixedprices for their energy may find that their supplier has to makesurcharges at the end of the financial year to balance thecounterpartys books. Some businesses have already seen a similar issue of

surcharges arise because of a separate programme that providesfixed payments for small renewable energy schemes includingPV. The rate of those charges is fixed but their volume does notbecome clear until the end of the year. That means energysuppliers either make a high estimate and charge accordingly, or

THE ENERGY BILL11

Draft strike price, /MWh (2012 prices)

Technology 2015/16 2016/17 2017/18 2018/19 Potential deploymentin 2020, GW

Hydro 95 95 95 95 95 1.7

Offshore wind 155 155 150 140 135 8 - 16

Onshore wind 100 100 100 95 95 09 - 12

Large solar PV 125 125 120 115 110 2.4 - 3.2

Biomass conversion 105 105 105 105 105 1.2- 4

Dedicated biomass with CHP 120 120 120 120 120 0.3

Energy from waste with CHP 90 90 90 90 90 0.5

Geothermal 125 120 120 120 120 0.1

Anaerobic digestion 145 145 145 140 135 0.2

Advanced conversion technologies 155 155 150 140 135 0.3

bill that are intended to support the three headline policy goalsof affordability, security and decarbonisation. They are a subsidyregime for low-carbon generating plant known as Contracts forDifference (CfD) to attract investment; plans for a capacitymarket that will ensure flexible plant (which in practice wouldbe mainly gas-fired) is available whenever it is needed; and anEmissions Performance Standard (EPS) that should make itimpossible to build plants (generally coal-fired) that emit highlevels of carbon dioxide. The EPS is likely to have the least direct effect on customers.

Before looking in detail at the other two mechanisms, it is worthconsidering some other measures that have been taken outsidethe energy bill that reinforce the governments strategy anddirectly affect energy customers.An important plank of government and international

strategy has been to try to develop a price for carbon, on theassumption that - despite being a colourless, odourless gas andone that appears in nature - it is just as much of a pollutant asother power station emissions like sulphur dioxide and the costof managing it must be attributed to the producer. That is thetheory behind the EUs Emissions Trading Scheme (ETS), whichaffects some large users directly and all customers indirectly,because it means companies including power utilities - incurcosts when they emit carbon dioxide. If the ETS worked as intended it would naturally drive

companies towards lower-carbon investments; but the price ofcarbon in the scheme is far too low to have this effect. TheBritish government has responded by setting a floor price forcarbon dioxide in Great Britain. It wants the price of carbon tostart at 16 per tonne emitted this year, to reach 30 per tonneby 2020, and 70 per tonne in 2030. If the value of carbon in theETS is below that and this year it is closer to the 4 mark emitters are charged by the government for the difference. The measure has been opposed by intensive energy users,

who say they will be incentivised to move to countries wherecarbon and therefore energy costs are lower. Thegovernment has some sympathy with that view and has offeredcompensation. The measure also puts government in the odd position of

having a policy intended to support higher carbon prices thatgives it a direct financial benefit while the carbon price stayslow, because the top-up, which could be 4 billion in the next

three years, is paid directly to the Treasury. It has also been suggested that the price support could be

short-lived. Its true that as a Treasury measure the carbon pricesupport could be removed in the coming years as easily as it wasadded (in a budget announcement), but that income stream ishard to give up. Shadow chancellor Ed Balls also gave stronghints that he would retain it in a Green Alliance meeting in July.He said that good environmental taxes incentivise the rightbehaviour by properly externalising costs, and added greentaxes that dont do anything to help the environment areparticularly perverse. But he said he wasnt in the mood to giveup tax revenues. That raises the possibility that the income from the price floor

may be allocated to improve energy efficiency and help the fuel-poor, as advocated by an alliance of consumer and green groups.But for businesses, the message is that carbon price support isprobably here to stay.

Predictable or not? Contracts for DifferenceOne merit of the carbon floor price is that it is predictable.

There is also a carrot in its design. Although it is a tax at themoment, it is in fact a contract for difference (CfD). Businessespay the top-up fee if the ETS price of carbon is below the pricefloor - but if the carbon price peaks above a price ceilinggovernment will pay the difference. That may be unlikely, but itprovides certainty of a sort.A high carbon price is one way of trying to get power

suppliers to switch to low-carbon forms of generation, but at themoment it is not enough. There are a couple of reasons. First,many low-carbon options are at a relatively early stage ofdevelopment so they are still expensive to build. Secondly, mostof their cost arises right at the start, because fuel costs are lowand the capital cost to build the plant is high. That requires aninvestor to take what could be an expensive gamble, and to takethat on the investor wants a guarantee that there will besufficient return on investment.Previously the UK government tried to manage this via the

Renewables Obligation, which required energy suppliers to use agrowing proportion of power from renewable sources or pay afine. That worked well in its original aim of bringing thecheapest renewables sources (generally landfill gas and wind)online as fast as possible. But it failed in some aspects. It had to

THE ENERGY BILL10


be refined to give bigger subsidies to less developed renewables,and as it was designed so that the target proportion ofrenewables always had unreachable headroom somegenerators made very large profits. What is more, it gave nosupport to nuclear, which the Department of Energy andClimate Change (Decc) sees as the largest low-carbongeneration option, and one that would be required to meetclimate targets. Nuclear has the same high capital cost and slowreturn problem as renewables, but multiplied many times andit is unpopular and slow to build, meaning any developer wouldhave to make a multi-year multi-billion pound commitmentyears before it sees any return.Deccs solution is the feed-in tariff with Contract for

Difference (CfD FIT) that forms the centrepiece of the bill. It isintended to provide a predictable return for investors in newgeneration and at the same time give customers somepredictability on prices. There is a strike price for each type oftechnology that Decc sees as a fair return. Generatingcompanies receive a top-up payment if the power price is belowthe strike price, and pay back the difference if the power price isabove that level. The strike price is intended to be set at a level that will tempt

investors to invest in new power projects. But in theory the

guaranteed price will also mean investors accept a somewhatlower rate of return than they would for a risky project. The CfDwill not mean prices fall. Far from it, as a glance at the strikeprices set out by Decc show (see table). But the governmenthopes they are at a level that will maintain stable prices forinvestors and users. Investors have been wary about the CfD mechanism, although

most would say that once it is in place they will work within it. It has some potential issues for customers too. Price top-ups

and repayments will be managed by a government-backedcounterparty but some important practical details of itsmethodology are unclear. For example, will the counterparty beable to hold a buffer fund of cash from one year to the next tosmooth payment levels? If it does not, businesses paying fixedprices for their energy may find that their supplier has to makesurcharges at the end of the financial year to balance thecounterpartys books. Some businesses have already seen a similar issue of

surcharges arise because of a separate programme that providesfixed payments for small renewable energy schemes includingPV. The rate of those charges is fixed but their volume does notbecome clear until the end of the year. That means energysuppliers either make a high estimate and charge accordingly, or

THE ENERGY BILL11

Draft strike price, /MWh (2012 prices)

Technology 2015/16 2016/17 2017/18 2018/19 Potential deploymentin 2020, GW

Hydro 95 95 95 95 95 1.7

Offshore wind 155 155 150 140 135 8 - 16

Onshore wind 100 100 100 95 95 09 - 12

Large solar PV 125 125 120 115 110 2.4 - 3.2

Biomass conversion 105 105 105 105 105 1.2- 4

Dedicated biomass with CHP 120 120 120 120 120 0.3

Energy from waste with CHP 90 90 90 90 90 0.5

Geothermal 125 120 120 120 120 0.1

Anaerobic digestion 145 145 145 140 135 0.2

Advanced conversion technologies 155 155 150 140 135 0.3

THE ENERGY BILL12

take a cautious approach that may mean they have to makesurcharges. It is not clear that the CfD counterpartyarrangements will avoid this problem.

Smoothing the peaks: the capacity mechanismBringing a large amount of renewables into the system raises

some management issues. In a traditional system so-calledbaseload plants would run more or less continuously to meet theminimum requirement. Other types of plant would be called on(dispatched) to run regularly for part of each day or for shortperiods during peak use.Renewables-based systems operate differently. There is usually

more generating capacity, so when there is wind and sun there isabundant power available, but there are occasions when top-upor backup power is needed. The system must have somedispatchable power usually gas turbines available, but theymay be used very seldom, which makes them a problematicinvestment. One way of managing this is to allow prices to risevery high in the periods of shortage, but to convince investors totake a gamble on plant that could be rarely used would requirewhat has been described as an eyewateringly high peak priceand that is unappetising for both customers (especially thosewho take on some market risk) and, crucially, politicians. Instead, Decc plans to introduce a so-called capacity

mechanism. That would give companies with suitable powerplants ongoing payments for making their plant available. As aresult prices at times of shortage and, Decc believes, at othertimes too would be damped down. There are debates about the exact form of the mechanism. But

it raises interesting possibilities for customers because it will alsoallow demand side measures to be offered. In some ways thesewill mirror interruptible contracts already offered to large gasand electricity users, who stand ready to cut or replace theirdemand in exchange for a compensation payment. The capacitymechanism could expand this in several ways, although detailsare currently sketchy. It may be possible for customers to offer paid services such as:

retiming their peak demand out of peak hours; makingpermanent, verifiable demand reductions; being able to cutdemand at short notice; or providing necessary power (if theyhave backup generators, for example). Some large companiesalready provide such services, but Decc hopes the capacity

mechanism will provide a route for more companies toparticipate, either directly or via aggregators companies Decchopes will act as middlemen to give small companies a simpleroute to offer demand services. We await further detail on the final form of the capacity

mechanism but Decc is expecting to accept bids in an auctionnext year for capacity (or demand side options) to be deliveredin 2017.

The next two yearsA final point that should be made about the Energy Bill is that

it cannot bring new capacity online in the next two years. Thereis simply not enough time for even the most fast-buildtechnologies to come on line in that time but a programme ofplant closures will continue. The result is that our powercapacity margin will be very tight in the next two winters. Just how tight is impossible to predict, as it depends on some

unknowables like how cold and windy the winters will be, andwhether we will have top-ups available across interconnectorswith our neighbours. Nor is the situation unprecedented: thecapacity margin was at a similar level in Great Britain in the1990s, and although it is low in British terms, it is within regularlimits used by some of our neighbouring countries.Nevertheless, it is a threat and opportunity for energy users.

The opportunity is to test the opportunity of providing demandresponse, as National Grid is expanding its regular wintercontracts to be sure of balancing the system. The most likelythreat is not blackouts that possibility is remote but pricespikes as energy suppliers pay above the odds to secure power ina tight market.

Janet WoodeditorNew Power magazinewww.newpower.info


The benets of being part of Drax are passed directly on to youUnlike most suppliers, Haven operates 'as one' with Drax, so our customers benetfrom the removal of trading margins and access to a combined power trading desk.This means we can offer our customers the best possible prices.

We can also offer Climate Change Levy (CCL) exempt energy now, and in the future.Generation and retail, working together. Sounds good, doesnt it?

Talk to us now about the advantages we could bring to your business.

Call 01473 707755Email [email protected]/ep

THE POWEROF UNITY

Discover the differencefor yourself

CALL US ON01473 707755and speak to one of our experts

VISIT US AT THEENERGY EVENT ONSTAND C32
THE ENERGY BILL12

take a cautious approach that may mean they have to makesurcharges. It is not clear that the CfD counterpartyarrangements will avoid this problem.

Smoothing the peaks: the capacity mechanismBringing a large amount of renewables into the system raises

some management issues. In a traditional system so-calledbaseload plants would run more or less continuously to meet theminimum requirement. Other types of plant would be called on(dispatched) to run regularly for part of each day or for shortperiods during peak use.Renewables-based systems operate differently. There is usually

more generating capacity, so when there is wind and sun there isabundant power available, but there are occasions when top-upor backup power is needed. The system must have somedispatchable power usually gas turbines available, but theymay be used very seldom, which makes them a problematicinvestment. One way of managing this is to allow prices to risevery high in the periods of shortage, but to convince investors totake a gamble on plant that could be rarely used would requirewhat has been described as an eyewateringly high peak priceand that is unappetising for both customers (especially thosewho take on some market risk) and, crucially, politicians. Instead, Decc plans to introduce a so-called capacity

mechanism. That would give companies with suitable powerplants ongoing payments for making their plant available. As aresult prices at times of shortage and, Decc believes, at othertimes too would be damped down. There are debates about the exact form of the mechanism. But

it raises interesting possibilities for customers because it will alsoallow demand side measures to be offered. In some ways thesewill mirror interruptible contracts already offered to large gasand electricity users, who stand ready to cut or replace theirdemand in exchange for a compensation payment. The capacitymechanism could expand this in several ways, although detailsare currently sketchy. It may be possible for customers to offer paid services such as:

retiming their peak demand out of peak hours; makingpermanent, verifiable demand reductions; being able to cutdemand at short notice; or providing necessary power (if theyhave backup generators, for example). Some large companiesalready provide such services, but Decc hopes the capacity

mechanism will provide a route for more companies toparticipate, either directly or via aggregators companies Decchopes will act as middlemen to give small companies a simpleroute to offer demand services. We await further detail on the final form of the capacity

mechanism but Decc is expecting to accept bids in an auctionnext year for capacity (or demand side options) to be deliveredin 2017.

The next two yearsA final point that should be made about the Energy Bill is that

it cannot bring new capacity online in the next two years. Thereis simply not enough time for even the most fast-buildtechnologies to come on line in that time but a programme ofplant closures will continue. The result is that our powercapacity margin will be very tight in the next two winters. Just how tight is impossible to predict, as it depends on some

unknowables like how cold and windy the winters will be, andwhether we will have top-ups available across interconnectorswith our neighbours. Nor is the situation unprecedented: thecapacity margin was at a similar level in Great Britain in the1990s, and although it is low in British terms, it is within regularlimits used by some of our neighbouring countries.Nevertheless, it is a threat and opportunity for energy users.

The opportunity is to test the opportunity of providing demandresponse, as National Grid is expanding its regular wintercontracts to be sure of balancing the system. The most likelythreat is not blackouts that possibility is remote but pricespikes as energy suppliers pay above the odds to secure power ina tight market.

Janet WoodeditorNew Power magazinewww.newpower.info


The benets of being part of Drax are passed directly on to youUnlike most suppliers, Haven operates 'as one' with Drax, so our customers benetfrom the removal of trading margins and access to a combined power trading desk.This means we can offer our customers the best possible prices.

We can also offer Climate Change Levy (CCL) exempt energy now, and in the future.Generation and retail, working together. Sounds good, doesnt it?

Talk to us now about the advantages we could bring to your business.

Call 01473 707755Email [email protected]/ep

THE POWEROF UNITY

Discover the differencefor yourself

CALL US ON01473 707755and speak to one of our experts

VISIT US AT THEENERGY EVENT ONSTAND C32
How do you expand energy efficiencyand obtain theuptake that is regularly referred to by government andin numerousreports to affect a lasting changeon demand sideconsumption

The large cost-effective potential for improving energyefficiency has been widely recognized in the last fewyears. McKinsey & Co. estimated that $170 billion ayear invested in efficiency globally would reduce global energydemand by the equivalent of 64 million barrels a day by 2020 andhave a 17% IRR at an oil price of $50 per barrel. TheInternational Energy Agencys Efficient World scenario showeda boost to cumulative economic output by 2035 of $18 trillion equivalent to the current size of the economies of the US,Canada, Mexico and Chile combined, and that growth in globalenergy demand would be halved relative to their New Policiesscenario, easing energy security concerns and reducing CO2emissions. In the UK DECCs Energy EfficiencyDeployment Office has identified the potential toreduce electricity demand by 196 TWh a year by2020, equivalent to 22 power stations. Thepotential to improve efficiency significantly is clear

- the issue now is how to implement that potential and therebychange our energy future from one of ever increasing supplycapacity, and possible supply constraints, to one in which wesignificantly reduce our energy use per unit of economic outputand manage overall demand. People often ask, if efficiency is so

good an investment why isnt ithappening?. It is importantto be clear that improvingenergy efficiency ishappening and efficiencyin all its guises is a rapidly

growing market.Over the last

ENERGY EFFICIENCY14

thirty years improved efficiency has delivered more energyservices than all other energy sources combined and that hashappened with us paying relatively little attention to the subject.We now have the opportunity to accelerate the rate ofimprovement by scaling up efficiency activities of all kinds in allsectors and that means scaling up demand for efficiency, supply ofefficiency goods and services, and the flow of finance into

efficiency.Lets examine two of these factors, increasing demand and

increasing the flow of finance. If we get those right therewill be market pull to build up the supply side whichbusiness will respond to.

The first reality is that energy efficiency is not cool and ofcourse it is invisible very few consumers wake up and sayI am going to buy some energy efficiency today however

much they complain about

their energy bills. For business it is largely seen as a defensivecost-cutting issue rather than an offensive revenue growthopportunity and therefore destined always to have lower priority.We need new business models that take energy efficiency out ofthe dull and into the must have for consumers and we needbusiness leaders to see the strategic advantages that improvedefficiency can bring.

Building demand for greater efficiency has to be based oneducation about what is possible and what the benefits are,coupled with capacity building to improve skills in energyefficiency, and this involves working at all levels from institutionalshareholders, through CEOs and CFOs, through specialist energy

managers and on to theshop floor. Part of this

ENERGY EFFICIENCY15

How do you expand energy efficiencyand obtain theuptake that is regularly referred to by government andin numerousreports to affect a lasting changeon demand sideconsumption

The large cost-effective potential for improving energyefficiency has been widely recognized in the last fewyears. McKinsey & Co. estimated that $170 billion ayear invested in efficiency globally would reduce global energydemand by the equivalent of 64 million barrels a day by 2020 andhave a 17% IRR at an oil price of $50 per barrel. TheInternational Energy Agencys Efficient World scenario showeda boost to cumulative economic output by 2035 of $18 trillion equivalent to the current size of the economies of the US,Canada, Mexico and Chile combined, and that growth in globalenergy demand would be halved relative to their New Policiesscenario, easing energy security concerns and reducing CO2emissions. In the UK DECCs Energy EfficiencyDeployment Office has identified the potential toreduce electricity demand by 196 TWh a year by2020, equivalent to 22 power stations. Thepotential to improve efficiency significantly is clear

- the issue now is how to implement that potential and therebychange our energy future from one of ever increasing supplycapacity, and possible supply constraints, to one in which wesignificantly reduce our energy use per unit of economic outputand manage overall demand. People often ask, if efficiency is so

good an investment why isnt ithappening?. It is importantto be clear that improvingenergy efficiency ishappening and efficiencyin all its guises is a rapidly

growing market.Over the last

ENERGY EFFICIENCY14

thirty years improved efficiency has delivered more energyservices than all other energy sources combined and that hashappened with us paying relatively little attention to the subject.We now have the opportunity to accelerate the rate ofimprovement by scaling up efficiency activities of all kinds in allsectors and that means scaling up demand for efficiency, supply ofefficiency goods and services, and the flow of finance into

efficiency.Lets examine two of these factors, increasing demand and

increasing the flow of finance. If we get those right therewill be market pull to build up the supply side whichbusiness will respond to.

The first reality is that energy efficiency is not cool and ofcourse it is invisible very few consumers wake up and sayI am going to buy some energy efficiency today however

much they complain about

their energy bills. For business it is largely seen as a defensivecost-cutting issue rather than an offensive revenue growthopportunity and therefore destined always to have lower priority.We need new business models that take energy efficiency out ofthe dull and into the must have for consumers and we needbusiness leaders to see the strategic advantages that improvedefficiency can bring.

Building demand for greater efficiency has to be based oneducation about what is possible and what the benefits are,coupled with capacity building to improve skills in energyefficiency, and this involves working at all levels from institutionalshareholders, through CEOs and CFOs, through specialist energy

managers and on to theshop floor. Part of this

ENERGY EFFICIENCY15

capacity building should be around the critical area ofmeasurement and verification of savings (M&V), part should bearound awareness and behaviour change. Getting the attentionof senior decision makers means reframing the energy efficiencystory through techniques such as comparing energy costs andpotential savings to net profits rather than total costs, andidentifying energy security risks at corporate and local levels. Forelected officials the debate needs to be framed in terms of importcosts (nationally or locally) and the impact on local employment.An important way of building demand for efficiency is the use

of standards, notably ISO 50001, Energy Management Systems.ISO 50001 sets out the process of energy management at all levels,from policy to implementation, and uses the Plan, Do, Check, Actsystem of continuous improvement. It embeds the improvementof energy efficiency into organisations basic systems. The use ofISO 50001 has grown rapidly since its introduction in 2011 butcan be further encouraged by government and large businessesadopting it as well as incorporating it into their supplierprocurement criteria. A major way in which additional demand in the UK can be

created is to use Electricity Market Reform (EMR) to introduce amarket mechanism for aggregating demand side projects andensuring that providers of such projects are rewarded in a waythat reflects the full value to the electricity system. Althoughthere is promise that the demand side will be incorporated intothe Capacity Mechanism the details are not yet clear and the devilreally will be in the detail. The government should not miss thisonce in a generation opportunity to create a large scale energyefficiency and demand response market. Elsewhere in the world,notably the USA, we are seeing innovative policies to decoupleutility profits from energy supplied beginning to have an impacton reducing demand.Many of the investments in energy efficiency will need to be

funded by third party investors rather than the project hostswhich means that the problems of energy efficiency financingneed to be addressed. On the face of it the returns from efficiencyprojects should be attractive as they are low risk and can providelong-term income. The constraints on growth are; a lack ofunderstanding and knowledge of the opportunity amongst theinvestor community, lack of confidence in the savings even frominvestors interested in the space, lack of standardization ofapproach, high transaction costs, the small scale of individual

projects, the need for long-term debt, and the lack of a secondarymarket. These issues are being addressed by the Investor Confidence

Project (ICP) in the USA which is bringing together the energyefficiency industry and major investors interested in the space todevelop protocols for different types of buildings that standardizethe approach to developing and implementing energy efficiencyprojects. We need a UK and European equivalent that can buildon and adapt the work of the ICP to European standards.Ultimately we need a global market in energy efficiencyinvestments in which standards and processes are globallyrecognized. This will drive both the deal flow in the primarymarket and enable a secondary market. No discussion of energy efficiency is complete without

mentioning the Jevons paradox, which can be summarized by thephrase, saving energy leads to greater energy use not less. Nearlyall studies of the so called rebound effect show that the effect isless than one, i.e. for every unit of energy saved less than one unitof additional demand is created. There are numerous examples ofbusinesses that have achieved both relative and absolutereductions in energy input over many years. Furthermore, somerecent work by the American Council for an Energy EfficientEconomy and others shows that energy efficiency has a muchgreater positive effect on the growth of an economy than waspreviously thought. In short Jevons is a red herring that shouldnot distract us from working to accelerate the rate ofimprovement in energy efficiency across the economy. Energy efficiency represents one of the largest business

opportunities on the planet. Exploiting that opportunity willproduce huge benefits in terms of productivity, improved energysecurity, reduced emissions and economic growth. We now needto fully recognize the facts and put improving efficiency at theheart of energy policy and programmes at all levels.

Steven Fawkeswww.onlyelevenpercent.com

ENERGY EFFICIENCY16


Changing to Value at Risk energy management puts Arsenal in

PremierLeague for energy savings

Our ClientArsenal FC are one of the English Football Premierships biggest

and most famous teams. Their home ground is the magnificentlymodern state-of-the-art Emirates Stadium, and they also havetheir training centre at Colney in Hertfordshire.

ObjectiveSchneider Electric already had a relationship with Arsenal FC

through work done for energy management and carbon reductionat the Emirates Stadium, and water usage reduction at the clubstraining ground at St Albans. The new challenge was now tooptimise their energy purchasing.

Our SolutionThe solution was to create a risk-managed flexible purchasing

plan. This was based on a Value at Risk (VaR) scheme devisedaround how much energy the client wants to procure at a fixedprice, and how much they are prepared to risk or hedge againstthe changing market values, within agreed parameters.

BenefitsAs a result of the adoption of the plan, Arsenal FC have, and

will, save against their baseline predictions (see above right).

We have been extremely happy with the results of our energypurchasing so far, which is on course to deliver some significantsavings compared to our previous fixed contract purchasing strategy.

This approach is completely different to our previous fixed priceapproach. The all important thing in todays energy market isensuring a robust strategy which protects you from market volatilitybut still allows you to take advantage of favourable markets.

With this risk managed approach we have the reassurance of thebudget we set at the beginning being the worst case scenario andanything below are savings.John Beattie, Stadium & Facilities Director

CASE STUDY17

Schneider ElectricTel: 0800 279 5500enquiries@ems.schneider-electric.comwww.schneider-electric.com

ElectricitySeptember 2011 to May 2012 - saving 98,899June 2012 to May 2013 - saving 107,207June 2013 to May 2014 - saving 92, 192June 2014 to Sep 2014 - saving 46,468GasSeptember 2011 to May 2012 - saving 40,407June 2012 to May 2013 - saving 116,249June 2013 to May 2014 - saving 126,294June 2014 to September 2014 - saving 22,186
capacity building should be around the critical area ofmeasurement and verification of savings (M&V), part should bearound awareness and behaviour change. Getting the attentionof senior decision makers means reframing the energy efficiencystory through techniques such as comparing energy costs andpotential savings to net profits rather than total costs, andidentifying energy security risks at corporate and local levels. Forelected officials the debate needs to be framed in terms of importcosts (nationally or locally) and the impact on local employment.An important way of building demand for efficiency is the use

of standards, notably ISO 50001, Energy Management Systems.ISO 50001 sets out the process of energy management at all levels,from policy to implementation, and uses the Plan, Do, Check, Actsystem of continuous improvement. It embeds the improvementof energy efficiency into organisations basic systems. The use ofISO 50001 has grown rapidly since its introduction in 2011 butcan be further encouraged by government and large businessesadopting it as well as incorporating it into their supplierprocurement criteria. A major way in which additional demand in the UK can be

created is to use Electricity Market Reform (EMR) to introduce amarket mechanism for aggregating demand side projects andensuring that providers of such projects are rewarded in a waythat reflects the full value to the electricity system. Althoughthere is promise that the demand side will be incorporated intothe Capacity Mechanism the details are not yet clear and the devilreally will be in the detail. The government should not miss thisonce in a generation opportunity to create a large scale energyefficiency and demand response market. Elsewhere in the world,notably the USA, we are seeing innovative policies to decoupleutility profits from energy supplied beginning to have an impacton reducing demand.Many of the investments in energy efficiency will need to be

funded by third party investors rather than the project hostswhich means that the problems of energy efficiency financingneed to be addressed. On the face of it the returns from efficiencyprojects should be attractive as they are low risk and can providelong-term income. The constraints on growth are; a lack ofunderstanding and knowledge of the opportunity amongst theinvestor community, lack of confidence in the savings even frominvestors interested in the space, lack of standardization ofapproach, high transaction costs, the small scale of individual

projects, the need for long-term debt, and the lack of a secondarymarket. These issues are being addressed by the Investor Confidence

Project (ICP) in the USA which is bringing together the energyefficiency industry and major investors interested in the space todevelop protocols for different types of buildings that standardizethe approach to developing and implementing energy efficiencyprojects. We need a UK and European equivalent that can buildon and adapt the work of the ICP to European standards.Ultimately we need a global market in energy efficiencyinvestments in which standards and processes are globallyrecognized. This will drive both the deal flow in the primarymarket and enable a secondary market. No discussion of energy efficiency is complete without

mentioning the Jevons paradox, which can be summarized by thephrase, saving energy leads to greater energy use not less. Nearlyall studies of the so called rebound effect show that the effect isless than one, i.e. for every unit of energy saved less than one unitof additional demand is created. There are numerous examples ofbusinesses that have achieved both relative and absolutereductions in energy input over many years. Furthermore, somerecent work by the American Council for an Energy EfficientEconomy and others shows that energy efficiency has a muchgreater positive effect on the growth of an economy than waspreviously thought. In short Jevons is a red herring that shouldnot distract us from working to accelerate the rate ofimprovement in energy efficiency across the economy. Energy efficiency represents one of the largest business

opportunities on the planet. Exploiting that opportunity willproduce huge benefits in terms of productivity, improved energysecurity, reduced emissions and economic growth. We now needto fully recognize the facts and put improving efficiency at theheart of energy policy and programmes at all levels.

Steven Fawkeswww.onlyelevenpercent.com

ENERGY EFFICIENCY16


Changing to Value at Risk energy management puts Arsenal in

PremierLeague for energy savings

Our ClientArsenal FC are one of the English Football Premierships biggest

and most famous teams. Their home ground is the magnificentlymodern state-of-the-art Emirates Stadium, and they also havetheir training centre at Colney in Hertfordshire.

ObjectiveSchneider Electric already had a relationship with Arsenal FC

through work done for energy management and carbon reductionat the Emirates Stadium, and water usage reduction at the clubstraining ground at St Albans. The new challenge was now tooptimise their energy purchasing.

Our SolutionThe solution was to create a risk-managed flexible purchasing

plan. This was based on a Value at Risk (VaR) scheme devisedaround how much energy the client wants to procure at a fixedprice, and how much they are prepared to risk or hedge againstthe changing market values, within agreed parameters.

BenefitsAs a result of the adoption of the plan, Arsenal FC have, and

will, save against their baseline predictions (see above right).

We have been extremely happy with the results of our energypurchasing so far, which is on course to deliver some significantsavings compared to our previous fixed contract purchasing strategy.

This approach is completely different to our previous fixed priceapproach. The all important thing in todays energy market isensuring a robust strategy which protects you from market volatilitybut still allows you to take advantage of favourable markets.

With this risk managed approach we have the reassurance of thebudget we set at the beginning being the worst case scenario andanything below are savings.John Beattie, Stadium & Facilities Director

CASE STUDY17

Schneider ElectricTel: 0800 279 5500enquiries@ems.schneider-electric.comwww.schneider-electric.com

ElectricitySeptember 2011 to May 2012 - saving 98,899June 2012 to May 2013 - saving 107,207June 2013 to May 2014 - saving 92, 192June 2014 to Sep 2014 - saving 46,468GasSeptember 2011 to May 2012 - saving 40,407June 2012 to May 2013 - saving 116,249June 2013 to May 2014 - saving 126,294June 2014 to September 2014 - saving 22,186
Energy buyers should demand more for less says AndrewBuckley, director general, Major Energy Users Council

The Energy Act breaks new ground for larger energy usersas well as for the suppliers. Primarily a result of the workcarried out for DECCs Electricity Market Reform (EMR),the Act sets the ground rules for future plant and infrastructureinvestment and points the way for how business customers need torespond as we move towards a low carbon future.Providing new capacity is clearly a priority. Ofgem flagged up

its concerns recently over running out of power plant reserve atpeak demand times and earlier this year we were within a fewhours of running out of gas with our main storage in the RoughNorth Sea field fully depleted. Perceived short term shortagesmean spikey prices and buyers now need to cope with increasingprice volatility as well as the general price uncertaintiessurrounding the global gas market and our less than liquid powermarket.Hard to believe that EMR is now over three years in the making

as there are still many aspects needing to be tied down. Not theleast for customers will be how the demand-side measuresintroduced late on during the Bills passage through the House ofCommons pans out and how the new capacity market will finallyshapes up.

The Only Way Is UpPrices for larger users appear firmly set on a long term upward

trend. Projections of 80% plus increases in real terms by the endof the decade are not uncommon although history tells us that theonly certainty in any energy price forecast is that it will be wrongWhat if, for example, a shale gas bonanza on the scale of USexperience, were to materialise?.Indeed, not so long ago the energy buyers primary concern was

to second guess where wholesale prices for gas and power would

likely go and how much of future requirements would it beprudent to reserve at pre-agreed prices using the forward curves.Delivery charges at that time were largely kept within inflationthrough relatively simple regulation and add-ons for promotingrenewables technology also kept within reasonable limits.No longer the case, I hear you cry, with exceptional increases in

delivery charges justified on the need to overhaul an aginginfrastructure and countless government initiatives for promotinglow carbon fuels and energy efficiency almost always ending upbeing paid for by the generality of customers through higher bills.The EU ETS, CCL, CRC and ROCs have now been joined by

the Carbon Floor Price Support and the now notorious Feed inTariff (FiT)s. Feed in Tariff pass through charges to largercustomer bills have already created waves amongst businesscustomers despite their charges being largely confined to payingdomestic customers for their solar installations. FiT costs have been much higher than expected. They have not

been applied consistently by different suppliers. And probably ofgreatest concern to larger users, they are not finally known for theyear to April until the following October requiring ex post billreconciliation and all that goes with it for customer budgets.Wholesale market price changes are now secondary to the

combination of these levies and delivery charges in ensuringprices continue rising for larger customers for many years tocome. To break the cycle would requires a radical rethink bygovernment and this on current evidence is sometime away atbest. The Energy Bill, for example, left the Commons with one ofthe largest majorities the House has seen for many a year (396 forand only eight voting against). All parties are in support andCaroline Flint and her team are ready to continue on if Labourwins the 2015 election.

ENERGY STRATEGY18


ENERGY STRATEGY19
Energy buyers should demand more for less says AndrewBuckley, director general, Major Energy Users Council

The Energy Act breaks new ground for larger energy usersas well as for the suppliers. Primarily a result of the workcarried out for DECCs Electricity Market Reform (EMR),the Act sets the ground rules for future plant and infrastructureinvestment and points the way for how business customers need torespond as we move towards a low carbon future.Providing new capacity is clearly a priority. Ofgem flagged up

its concerns recently over running out of power plant reserve atpeak demand times and earlier this year we were within a fewhours of running out of gas with our main storage in the RoughNorth Sea field fully depleted. Perceived short term shortagesmean spikey prices and buyers now need to cope with increasingprice volatility as well as the general price uncertaintiessurrounding the global gas market and our less than liquid powermarket.Hard to believe that EMR is now over three years in the making

as there are still many aspects needing to be tied down. Not theleast for customers will be how the demand-side measuresintroduced late on during the Bills passage through the House ofCommons pans out and how the new capacity market will finallyshapes up.

The Only Way Is UpPrices for larger users appear firmly set on a long term upward

trend. Projections of 80% plus increases in real terms by the endof the decade are not uncommon although history tells us that theonly certainty in any energy price forecast is that it will be wrongWhat if, for example, a shale gas bonanza on the scale of USexperience, were to materialise?.Indeed, not so long ago the energy buyers primary concern was

to second guess where wholesale prices for gas and power would

likely go and how much of future requirements would it beprudent to reserve at pre-agreed prices using the forward curves.Delivery charges at that time were largely kept within inflationthrough relatively simple regulation and add-ons for promotingrenewables technology also kept within reasonable limits.No longer the case, I hear you cry, with exceptional increases in

delivery charges justified on the need to overhaul an aginginfrastructure and countless government initiatives for promotinglow carbon fuels and energy efficiency almost always ending upbeing paid for by the generality of customers through higher bills.The EU ETS, CCL, CRC and ROCs have now been joined by

the Carbon Floor Price Support and the now notorious Feed inTariff (FiT)s. Feed in Tariff pass through charges to largercustomer bills have already created waves amongst businesscustomers despite their charges being largely confined to payingdomestic customers for their solar installations. FiT costs have been much higher than expected. They have not

been applied consistently by different suppliers. And probably ofgreatest concern to larger users, they are not finally known for theyear to April until the following October requiring ex post billreconciliation and all that goes with it for customer budgets.Wholesale market price changes are now secondary to the

combination of these levies and delivery charges in ensuringprices continue rising for larger customers for many years tocome. To break the cycle would requires a radical rethink bygovernment and this on current evidence is sometime away atbest. The Energy Bill, for example, left the Commons with one ofthe largest majorities the House has seen for many a year (396 forand only eight voting against). All parties are in support andCaroline Flint and her team are ready to continue on if Labourwins the 2015 election.

ENERGY STRATEGY18


ENERGY STRATEGY19
Turning the Tide on Rising CostsAgainst this background you can see that relying on the annual

tender for the lowest prices or admin charges for a flexiblecontract is about as robust as Canutes efforts to resist the waves.Likewise engaging a third party intermediary or energy consultantsolely for this purpose is missing the point. Delivered pricesregardless of the wholesale costs will continue to rise.To be fair the more switched on consultants and livelier

supplies have for some time seen this coming. Customers can nowtap into their half-hourly consumption data and see whether theyare using electricity unnecessarily or can switch part of theirrequirements away from high priced to lower priced periodsduring the day or week. Schemes for keeping down transmission charges by reducing

demand at system critical times have been around since thecompetitive power market started up in 1990 and these have beenjoined more recently by others. Aggregators have sprung up tocombine demand reductions from smaller players intomeaningful cost reductions to be shared amongst the participants.Even within DECC, demand reduction for larger users is finally

in vogue and this is to be much welcomed. Customers, it is thought,will have the ability to bid in temporary demand reductions into thenew power capacity market as a mirror image tosuppliers bidding in additional stand-bygeneration in order to keep thelights on. DECC also plans toreward customers makingpermanent reductions

in their consumption. Whilst plans have yet to be finalised, theseare likely to be based on the Feed in Tariff mechanism and providea rare opportunity for larger users to benefit.At the heart of the Electricity Market Reform process lies the

challenge of creating a mechanism to encourage new generatingplant investment by isolating the investors from the vagaries ofthe market. Investment for a 2 billion nuclear reactor, forexample, needs a firm commitment in terms of the prices itsoutput can command over the forty years it is designed to operatefor. This process was further complicated by the Secretaryof State at the time insisting forlornly that hewould only sanction new nuclear stationsif no public subsidy was involved.The answer the civil servants

came up with is the contract fordifference (cfd) which incorporates anagreed strike price for start-up generationtogether with forward escalation for thecontinuing output over the life of the

Energy Procurement 2013/14

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Transcript of Energy Procurement 2013/14