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Staying on top of energy costs

14 May 2023

Jodie Eaton gives some predictions for the energy market in 2023 and explains why efficiency, investment and decarbonisation will remain key priorities.

With major reforms introduced in April to help mitigate against market volatility, businesses should see 2023 as an opportunity to seize. 

While constraints on supply are likely to continue – as a result of the global geopolitical landscape and extreme weather events, wholesale gas prices have already started to fall. What’s more, the International Energy Agency has reported a major global uptick in renewable energy investment and predicts that this will further accelerate over the coming months.

To maximise opportunities, it is important to monitor developing trends, perfect strategies and maintain a clear focus on managing costs, consumption and risks. This, alongside advancing progress towards net-zero ambitions, will prove pivotal going forward.

The market shakeup under the Targeted Charging Review (TCR). Reforms to TNUoS (costs paid for transmission) and BSUoS (costs paid for balancing the grid) charges will be implemented, following in the same vein to the DUoS charge reforms (costs paid for distribution) introduced in April 2022. 

For businesses, this will mean a higher standing charge and lower unit rate - placing greater emphasis on the need to focus on smarter procurement, alongside a commitment to further invest time and money in long-term energy efficiency measures.  

Available options
Business energy is not a one size fits all scenario. Demand and costs depend on a wide range of factors, such as the age of the facilities and production assets, whether operations run 24/7, the potential for flexibility in operations and the opportunities for investment in more energy efficient processes, equipment and even on-site generation. 

One of the biggest drivers of change for all organisations is how the road to net-zero will affect them and what action they should be taking now and in the future. 

On 6 April 2022, it became mandatory for the largest UK-registered businesses to disclose climate-related financial information, aligned with the UK Government’s drive to reach net-zero by 2050. According to The Task Force on Climate-Related Financial Disclosures (TCFD), the benefits of disclosure include improved capital allocation, strategic planning, and risk mitigation.

Decarbonising energy supply can yield long-term efficiency benefits, providing a framework within the Sustainability Disclosure Requirements (SDR) to both identify and measure improvements. Investing in clean, secure, low-cost energy demonstrates leadership and helps build confidence in both investors and customers, factors that are increasing board level engagement with the challenge. 

Measuring carbon impact and considering Scope 1 (those created through daily operations), Scope 2 (those created elsewhere, but that the organisation directly imports)  and Scope 3 emissions (those an organisation is indirectly responsible for creating) all need to be tackled. 

To decarbonise Scope 1 emissions, businesses should aim to replace any hydrocarbon fuels with renewables, electrify heat wherever possible, install wind turbines and fit solar panels. To decarbonise Scope 2, work with your electricity supplier to buy carbon free, or lower carbon, power. 

Scope 3 is the most challenging to tackle, but the answer lies in co-operation, teamwork and collaborating with partners, suppliers and other stakeholders to manage your shared carbon responsibility. Ask your suppliers to report on their carbon emissions, help them to understand their energy usage and work together to reduce the carbon generated by doing business together.

Investing in the future 

As businesses look to de-risk their energy procurement strategies, one route that gives a level of certainty in a volatile energy market is power purchase agreements (PPAs). These contracts with renewable electricity generators can help achieve sustainability goals and lock in long-term pricing for renewable electricity, helping to manage the risk of volatile power markets while generating short-term savings on energy bills.

Expert advice is key to choosing the best option for your requirements from the wide range of PPAs available. You will also need the support of either your supplier or a third party to manage the physical delivery aspects of your PPA. They will handle the power operations and balancing for you, as well as fix and manage the power price along the tenure of the PPA and help you to promote the environmental attributes for both reporting purposes and to keep stakeholders up to date on your environmental performance. 

Whether it is better to secure volume at a fixed price upfront or leave yourself open to price variation will depend on the nature of the business, however, be aware that increased market volatility is likely to be a characteristic of the energy market for the long-term, especially as the supply mix transitions to increased levels of intermittent renewable sources.   

A changing market 
The Covid-19 pandemic and Russia’s invasion of Ukraine are just two of the factors that have forced businesses to adapt quickly to navigate disrupted markets. The energy sector is undergoing long-term transition and working in partnership with energy suppliers is just one way that the Government wants big business to innovate and come up with their own solutions within the framework of delivering decarbonisation. The Government has also recently concluded the consultation into its first Review of Electricity Market Arrangements (REMA) for more than 20 years.  

Described as potentially ‘the biggest electricity market shake-up in decades’, the proposals are designed to deliver a step change in the rate of deployment of low carbon technologies, reduce dependence on fossil fuel generation, encourage flexibility across the system, optimise assets, use pricing to encourage change in consumer use and maintain system security. 

A key element of proposals considers the potential shift from national pricing to locational pricing. Options include nodal pricing, also known as locational marginal pricing (LMP), which could see the UK moving from one single market to around 750 pricing markets.

A more likely approach, however, will be zonal pricing, where the network is divided into different zones such as a north/south split. Each area would have its own single wholesale price for electricity with boundaries reflecting major transmission constraints. The decisions on reform will be made this year giving businesses even more to think about when it comes to planning future energy needs. 

Having the right expertise available to help optimise energy efficiency, drive procurement performance and guide you through all the upcoming changes will deliver significant business benefits. Working collaboratively with your supplier is therefore crucial to developing a long-term strategy that will keep you in control. 

Jodie Eaton is CEO of Shell Energy UK.

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