Energy efficiency gets a boost
June 1st 2008

The business case for energy efficiency is has never been more appealing.The high cost of energy and new carbon cutting legislation are making the case for investing in energy efficiency more rewarding than ever before. And in a more challenging economic climate, a lower cost base is not to be scoffed at

It's all about the budget.

The most obvious driver for greater energy efficiency in business is simply the high cost of energy today. Reducing the amount of energy used as a cost saving initiative promises better payback now than at any other time in the history of the privatised UK energy market. The wholesale cost of electricity is now roughly four times what it was in 2001 when the wholesale market was given its big shake up with the new electricity trading arrangements to introduce more competition amongst electricity generators.Then, according to Ofgem, thanks to a combination of greater competition and an oversupply of generation, wholesale electricity prices had fallen by 40% in the four years prior to 2001 and fell by a further 15% over the following 18 months.

How things have changed.The oversupply in generation that existed at the turn of the century is far less in evidence.The recent implementation of the Large Combustion Plant Directive to reduce sulphurous,nitrous oxide and dust emissions from coal fired power production, means that roughly 10% of total generation capacity is living on borrowed time.Those plants which have not invested in emission reducing measures have only 20,000 operating hours left until mandatory closure in 2015.Many of the UK's aging nuclear plants will also come to the end of their operational lives within the next ten years.

Fuel costs for generators have risen sharply too.Coal and gas, which accounted for 75% of electricity production last year,have both seen record prices this year, which of course directly impacts prices for consumers. In many respects, the coal and gas markets take their lead from oil. Goldman Sachs, whose 2005 prediction of oil reaching $100 per barrel came true in January, recently predicted oil could reach $200bbl in the next two years,potentially even within the next six months.

So the indications are that those hoping today's high prices are a temporary blip may well be disappointed. No longer a cheap commodity, energy is now priced like a precious resource begging more efficient use.

From option to obligation Legislative incentives for more efficient energy use are growing too.

2001 was also a landmark year on this count with the introduction of the first significant tax on energy explicitly intended to encourage greater energy efficiency in business, the Climate Change Levy (CCL).

Although criticised as a blunt instrument, it's been very successful.

The CCL is estimated to be delivering annual savings of 3.5MtC against a target of 2MtC of the 60MtC or so that the business sector is responsible for.

Now two schemes will make the energy performance of buildings and businesses much more public.

The Energy Performance in Buildings Directive, which came into force this year, focuses on individual buildings and aims to achieve annual emissions savings of 0.6MtC by 2020.

It will allow the energy performance of buildings to be directly compared via two certificates based on design and use criteria.The Energy Performance Certificates (EPCs) provides an energy rating from A to G based on the design of the building, showing its current rating and what steps can be taken to improve its energy efficiency.The Display Energy Certificates (DECs) will show how well large public buildings are actually used and managed with an energy efficiency rating based on actual energy consumption.

The Carbon Reduction Commitment features several measures to reward investment in energy efficiency.Targeting around 5000 large non energy intensive organisations in the commercial and public sectors, this emissions trading scheme is aiming for annual savings of 1.2MtC out of the 14MtC for which this sector is responsible, via energy efficiency rather than renewable energy or offsetting.Defra has already changed the carbon reporting rules so all electricity from the grid including renewable has the same fuel emissions factor.

Participating firms will be required to buy carbon allowances to cover their emissions from 'on site energy use'.

These funds will be recycled based on the relative performance in reducing carbon emissions.A league table will be used to rank participants and determine their rebates.This league table will be published and it is hoped this will focus senior management attention on improving energy efficiency to ward off the risk to the company's reputation and brands for falling in the bottom of the table.

The scheme explicitly incentivises participants to install more Smart Meters on their non-half hourly metered sites and also join the Energy Efficiency Accreditation Scheme.Those that do will receive a boost to their rating in the league table and therefore a larger rebate.

The Energy Efficiency Accreditation Scheme may seem too onerous for many organisations, but the Smart Metering option should be an attractive option for many.Aside from the bonus to their league table ranking, these organisations will avoid the penalty of having to buy an additional 10% carbon allowances for energy use based on estimated readings.

Getting smarter The cost of Smart Meters has greatly reduced in recent years and for sites with a profile class of 05-08 in particular, they are a now very economic option.The Carbon Trust estimates a payback on metering investment of less than one year.

Many organisations that have already made the switch, particularly those with large numbers of sites, report significant reductions in administration because their bills are now based on regular accurate reads.That's because Smart Meters resolve the main obstacle for manual reads – site access for meter readers.

Accurate bills equals certainty of energy costs. Smart Meters also enable energy savings.The simple visibility of energy consumption makes people more efficient users.A field study of Smart Metering amongst small businesses revealed the visibility of energy consumption lead to savings of 5% on average with a potential of up to 12%.

Given the EU's and the UK's desire to show leadership in cutting carbon emissions, further schemes to encourage energy efficiency may well follow.Defra's new carbon reporting guidelines means signing up to renewable energy contracts to achieve zero carbon status is now redundant.The rising cost of energy may well ease but the days of cheap energy are probably long gone. So those organisations that take action to monitor and cut unnecessary energy use now will be best placed to thrive in future. From option to obligation

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