Expert energy analysis and insight for UK businesses.
For any company, the energy bill is just one of the essential costs of doing business – and creating value for their customers. Of course, different businesses have different appetites for certainty over their energy costs. But one thing’s for sure: there’s a bigger, more important story behind those figures. What many don’t realise is that while they’re paying for their energy, they’re also contributing to a more stable, more sustainable energy future for the UK and for generations to come.
We talked to Martin Pearce, Policy and Regulation Business Partner at EDF Energy, to get the bigger story of energy - one which will have an impact on the story of every business as its decision makers look to plan ahead and drive growth.
"My message to business customers going into 2018 would be…keep informed of what's changing in policy and regulation landscape. How that 's going to impact on you but more importantly, what opportunities there might be for you to take advantage of."
Over the last five years, the energy landscape has undergone a lot of change. What’s crucial over the next five years is that it settles. Key to making that happen will be robust and future-fit energy policy and regulation. While there are some big challenges ahead, the Government and the energy industry have risen to meet each and, in some cases, even turned it into an opportunity.
The energy trilemma
The three biggest challenges facing the energy industry can be simplified into what's known as the energy trilemma.
The first challenge is: how do we decarbonise our energy sources to mitigate the worst effects of climate change? The second challenge is: how can we secure the continuity of energy needed to balance supply and demand? Of course, meeting those two challenges will require significant levels of investment over the coming decades. So the third challenge is: how do we do that and keep energy affordable to all of us as customers.
Challenge 1: decarbonisation
In the UK, we've set targets for our decarbonisation into legislation. The climate change act of 2008 sets a clear target to reduce our emissions by 80% on 1990 levels by 2050.
To achieve that, change can be driven in three areas: transport, heat and electricity. Addressing the first two will require moves towards electrification – which makes addressing the third critical.
So the Government has responded to the decarbonisation challenge by securing investment in low carbon technologies - particularly renewables and nuclear - and by working to remove fossil fuel generation.
First, we saw the Renewable Obligation scheme that brought certainty of income for large-scale renewable projects, like solar, wind and biomass. Then we saw the Feed in Tariff (FiT) scheme that did the same for much smaller renewable programmes, like supporting domestic solar generation. Now, going forward, the key is going to be in expanding those renewables initiatives to support low-carbon generation projects.
So Contracts for Difference has been introduced and will, over time, replace the Renewables Obligation scheme. The CfD scheme aims to provide certainty to low carbon generators through a contracted price – quite simply, the difference between that contracted price and the market price is the income that they can rely on. And it works the reverse as well: if the market price is higher than that contracted price, then they will pay back into the system.
The real benefit of CfD is that it is driving that investment in low-carbon generation not just renewable technology.
Challenge 2: security of supply
We live in a modern society so we expect electricity to work whenever we switch it on, day or night. However, continuity of supply is at risk because of two factors. One: we're losing a lot of capacity generation on the network – in fact, we've already lost 30% since 2010. And two: while we're seeing increased investment in renewable energy, generation is dependent on when the sun shines and the wind blows.
Government has responded to the security of supply challenge by introducing what's called the Capacity Market. This scheme invites capacity providers to participate in an auction four years in advance of a future delivery date – and rewards successful bidders with a certain price for the amount of capacity they pledge to deliver. The reason the auctions are held four years in advance is so that successful bidders can plan ahead – if they intend on using an existing plant, they can upgrade and extend its life; and if they intend on using a new plant, they have a reasonable time frame to build one.
Challenge 3: affordability
And so to the bottom line. At a time when businesses are seeking certainty over their costs, it’s obviously imperative that we find a way to address these two challenges in the energy trilemma, whilst also ensuring we address the third: making sure energy is an affordable resource.
As is already evident, the Government has responded to the affordability challenge by introducing a range of commercially savvy reforms over the last few years, including putting a proper price on carbon emissions; implementing the Carbon Price Floor, which is driving out fossil fuels; introducing Contracts for Difference, which give investors in low carbon generators certainty of income; and setting up the Capacity Market, which aims to balance security of supply.
Key to the success of many of these schemes and initiatives is innovation in funding models. For example, with Contracts for Difference and Capacity Markets, the ‘auction’ model serves to drive down the cost of those technologies over time as generators compete with each other in a fair and accessible way.
Then, of course, Ofgem is currently carrying out a targeted charging review. They’re exploring the cost of electricity transmission and distribution to find a way to fund it that is proportionate and efficient over time and gives customers fair value.
What to look out for
Energy policy and regulation is always changing. So we’re no strangers to change – and, of course, it’s only realistic that there’ll be more change coming. What’s important for customers isn’t avoiding change or lamenting it, but keeping informed as it happens and responding to it in a way that works best for your business.
There are particular policies which are worth watching for as the future unfolds. The next set of energy audits for businesses under the Energy Savings Opportunities Scheme (ESOS) are coming up in 2019. Government is now consulting on what carbon reporting for business will look like from 2019, and how that links to that audit. Additionally, for public sector organisations they are planning to introduce a voluntary carbon target and reporting framework. In the shorter term, there is a lot of work going on around smarter meters and half-hourly settlements, as well as schemes like demand-side response and microgeneration.
Meanwhile, there are three actions you can take from now to be that much more certain about the future.
One: think about how you can control and manage your energy consumption more efficiently.
Two: keep informed on what’s changing in policy regulation and the energy landscape as well as how that’s going to impact on your business.
Three: educate yourself on what opportunities there may be for you to take advantage of, from generating your own energy to profiting from it.
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