Steve Armitage at SmartestEnergy discusses the implications of Ofgem's Project Discovery report for the consumer, particularly the business community.
Here Steve describes how large British businesses will be expected to foot the bill for grid infrastructure upgrades and low carbon legislation in the coming months and how energy purchasing managers need to reconsider their strategies in order to remain competitive on an international stage:
“Ofgem’s recent ‘Project Discovery’ report called for an urgent reform of the UK’s energy market and raised serious concerns over the future costs of energy bills. This should be a major wake-up call for large British businesses: adapt your energy purchasing strategies or risk losing your competitive edge.
The report follows a raft of measures announced last summer as part of the Low Carbon Transition Plan which will be introduced from this April. Each of these measures - from upgrading infrastructure to incentivising the growth of renewables - is a necessary step towards a long-term, sustainable energy policy. However, each will also involve costs that will inevitably affect businesses’ energy bills.
For example, one such measure is a £7.2 billion upgrade to the distribution network over the next five years, effective from the 1st of April, to replace out of date infrastructure, accommodate more renewable energy and support large scale trials of smart grids and other technologies. The cost of this is to be recovered from electricity users, with business consumers bearing the brunt of it.
Furthermore, while the grid itself gears up, the incentives intended to encourage the growth of renewable generation will also add additional costs to the corporate electricity bill. At present, the main policy mechanism for stimulating renewables growth in the UK is the Renewable Obligation (RO), whereby renewable electricity generators are paid by suppliers for each unit of renewable power they produce. Each year suppliers must meet a minimum target of renewable power supply set by the government.
The cost of this scheme is again ultimately passed on to customers and currently represents around 4% of business customers’ bills. This is set to grow in the near term as suppliers strive to meet their increasing annual obligations.
On top of this the government has just announced the introduction of the Feed-in Tariff (FiT) or ‘clean energy cashback’ scheme. From April 2010, all renewable generators producing less than 5MW of electricity will be eligible for a generation payment and export payment from the electricity company that buys their power – yet another cost that will ultimately have to be passed on to the business customer.
The combined impact of these charges will be felt for the first time later this year and will come as a severe shock to many. These costs are in addition to the Climate Change Levy (CCL) which business users are already subject to. Soon, around 40-50% of businesses’ electricity bills will account for the implementation of these low-carbon transition strategies.
However, with sufficient planning involving your supplier, the risks can be minimised. Moving away from a ‘one size fits all’ model and demanding a flexible, tailor made solution is key to staying ahead of the game.
For example, some companies, such as M&S, are already purchasing 100% renewable electricity to avoid paying the CCL charges and to show their support for local renewable generation.
Industrial energy users should even consider generating their own power on-site. This is an increasingly appealing option as it decreases dependence on the grid, thereby improving energy security and stabilising budgets.
Any excess electricity that is not used on-site is sold back to the grid, and often becomes a valuable additional revenue stream. Furthermore, most on-site renewable generators are eligible for RO certificates (ROCs) or FiTs even if their power isn’t sold to the grid.
Taking a proactive approach to your energy strategy, partnering with the right supplier who can structure agreements to maximise your returns, and integrating this with your company’s overall environmental policy, means many of the risks that arise from the Low Carbon Transition can actually be looked upon as opportunities. Those that recognise this will be the leading British businesses of the future.”
Steve Armitage is Director at SmartestEnergy, the UK’s largest purchaser and supplier of independently generated electricity
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