The Energyst asked consultants and suppliers for views on key energy challenges and opportunities facing businesses in the year ahead.
In the immediate term, hitting all three Triad periods is a key challenge for businesses, as failure to do so will mean substantially bigger power bills, according to Ben Spry, head of Npower’s risk management service.
As the year progresses, Spry says it is essential that energy managers are alert to incoming change.
Whether or not the Capacity Market (CM) is reinstated has a direct bearing on business cases for investment in onsite generation or demand-side response. The CM charge, if it is still collected by suppliers while the market is suspended, also affects the ability to accurately forecast budgets. Then there are Ofgem’s charging reviews. “Energy managers must be alert to all of that,” says Spry, who adds that “2019 is also the start of step changes in non-commodity costs”, particularly the CfD levy, and potentially for CCL cost increases.
The year “marks the start of a transition period for charges which affects customers’ ability to forecast or set business cases beyond three years”, says Spry. As such, the onus is on suppliers and consultants to guide businesses through a “massive” amount of change: “We are definitely in a period of transition and ambiguity, but there is a lot of intelligence that can help guide energy plans in short and long term – so it is a must to keep eyes open in order to be able to react to that.”
Capacity Market bonus?
David Oliver, senior energy consultant at Inenco, thinks there may be some upside from the suspension of the Capacity Market if the full amount expected to hit bills is not collected by suppliers.
Should businesses find themselves under budget as a result, “it might be wise to spend the surplus on energy efficiency measures”, says Oliver, particularly if the extra funds help get projects over the line.
Esos and SECR
Oliver advises businesses “to actually read their Esos reports” and consider acting on the auditor’s recommendations ahead of the next round of compliance in 2019.
Meanwhile, new Streamlined Energy and Carbon Reporting (SECR) regulations also take effect in 2019, under which about 11,000 companies will find their consumption and emissions ultimately published in the public domain.
The first reports under SECR will not be published until 2020 and there are no financial penalties. But those companies that are taking meaningful steps to improve sustainability will be visible to the public – as will those that are not. The year ahead is therefore an opportunity to take demonstrable action, advises Oliver.
Georgina Penfold, director at the Industrial and Commercial Operators Network (Icon), agrees SECR should encourage investment in energy efficiency.
“It puts energy and emissions firmly into the consciousness of the finance director,” she says. “Along with financial support from the government, it should help join the circle and hopefully result in funds being committed to energy management in every sector.”
Volatility, risk, reward
While cutting consumption should always cut bills, there is potential for upside for those that buy and sell power at the right time, according to Michael Coulten, senior business analyst at Vuepoint Solutions.
“Gathering storm clouds over the global economy suggest commodity price weakness could continue, driven more by softening demand than increasing supply,” says Coulten. “However recent moves by OPEC could delay declines in oil prices if output cuts can be delivered – a big if given domestic budget constraints. Negative supply shocks from Venezuela and Iran could also help buoy prices.”
Overall, he says the macro picture is highly uncertain, “so it’s a very good time to ensure your risk management policy is up to date with limits and buy triggers agreed and in place to ensure efficient execution”.
With volatility returning to energy markets, Jo Butlin, director at Energy Bridge, agrees on the need to carefully manage risk. But she advises large consumers to make sure they are joining the dots. That means, “developing an integrated energy strategy focusing on reducing consumption, directly sourcing generation and potentially accessing the emerging flexibility market – in addition to a supply contract that enables the development of all of the above at no additional cost”, says Butlin.
“The drivers behind rising non-commodity costs are the incentivisation of new renewables, development of the infrastructure to support them and funding the consequent increase of costs of balancing. The funds raised from consumers bills are used to pay generators and those accessing flexible markets – the smart game now is to not only contribute but also to receive, but that requires a more complex strategy,” she adds.
As a result, Butlin says responsibility for energy should no longer be shouldered solely by the energy manager.
“The opportunities are there to cut energy costs and carbon, but developing an appropriate strategy – and particularly how the different elements interrelate, and work together – requires procurement, finance and sustainability teams to work together to develop a single strategy,” she says.
Brexit: deal or no deal
Brexit is the great unknown in any outlook – and uncertainty tends to be the enemy of investment.
That has had a general impact on the sector, says Richard Howard, research director at Aurora Energy Research, but he highlights specific Brexit implications for carbon markets and interconnectors.
“There is some uncertainty regarding the UK’s ongoing participation in the EU ETS. In a ‘no deal’ scenario it looks like that we would exit the ETS and instead have a Carbon Emissions Tax at a fixed level of £16/tonne. In a ‘deal’ scenario there are a few possibilities – ranging from continued membership of the ETS, to a linked UK ETS scheme, to a simple Carbon Emissions Tax,” Howard suggests. He believes a ‘no deal’ Brexit could have impacts on the prospects for interconnector projects.
“Coming out of the [EU] Internal Energy Market could make power trading across interconnectors somewhat less flexible, leading to lower congestion rents. On top of this, outside the EU the UK could decide to make changes to the existing regimes – which favour interconnectors. For example interconnectors are currently exempt from grid charges as a result of EU rules – this could change after Brexit.”
Energy as a service and Amazon energy?
Energy companies are keen to sell services rather than kilowatt hours. Will 2019 be the year ‘energy-as-a-service’ (Eaas) comes of age?
Maybe, says Dan Smith, deputy vice-president, I&C Supply at Smartest Energy.
“Energy as a service feels like it has been in its infancy long enough. The challenge is whether suppliers can change their business models and skillsets,” says Smith, ”because the contracts you are selling are very different.
“It is refreshing to see a different breed of people within energy companies, but it is crucial that the left and right hand – the engineering and the market data sides – are brought closer together. That will be key [to the success or failure of energy as a service]. Hopefully it will happen in 2019.”
What about the big tech platforms disrupting energy supply? People have long talked about the Faangs (Facebook, Apple, Amazon, Netflix and Google) blowing everyone else away.
Smith, however, thinks 2019 may be too soon.
“It is not a profitable place to be right now. It is difficult for suppliers to make investment decisions, so energy might not be as attractive as other areas for a big player,” he says.
“I think they are on a watching brief, but you might see more strategic partnerships. We are seeing lots of smaller tech players link up with utilities and large car manufacturers, for example.”
Appetite for disruption
Peter Davies, CEO of smart energy platform Verv, thinks 2019 will see new energy service models emerge, with democratisation of energy underpinned by blockchain.
“Long-existing business models continue to be disrupted in all industries and we are starting to see this trickle into the energy space, with major players beginning to realise that new services and choices need to be offered to consumers, and at lower prices,” he suggests.
“Consumers have long been billed by kWh of electricity and confused by their energy bills. I believe we will see significant steps towards changing how consumers engage with their energy in 2019.”
Time to cut the chord?
Bobby Collinson, managing director of Noveus Energy, thinks the state of UK policy and regulation could lead to businesses cutting the chord connecting them to the public grid altogether.
“Is investment in energy generation in the UK dead? The Capacity Market suspension could be the last nail in the coffin. I would be incredibly reluctant to invest in energy assets in the UK with the current ever-changing regulatory framework,” he says.
“Then what? Does that start to facilitate what I believe is Nirvana in energy, self-generation using private wire to a consumer. Having done these, I believe this is the utopia of self-sufficiency; a true smart, decentralised network.”
Fill your boots with solar PV?
Alex Moor, lead analyst at flow storage company Red T, believes the biggest challenge for businesses in 2019 is “updating energy procurement and on-site generation strategies in line with recent changes brought about by Ofgem’s Targeted Charging Review, for example”.
He thinks businesses must develop “new, longer-term business models going into 2019, including managing wholesale energy price volatility and its inevitable effect on fixed price contracts”.
Moor believes falling solar costs represent the biggest opportunity for end users to lock in some certainty on costs in an uncertain environment.
“Energy managers should now be pushing to install as much solar as they can on their sites,” says Moor, suggesting long-duration storage assets can help businesses get better returns from PV.
This article was originally published in The Energyst’s January print issue. If you have some responsibility for energy or carbon within your organisation, you probably qualify for a free subscription.