As part of a recent industry webinar, Rob Labinski, Head of Electrification, Octopus Energy Group, offered some insight into the current volatile energy market, an outlook for the future and the impact and opportunities for the UK’s manufacturers.
As we are all too aware, energy volatility has increased dramatically over the last few years, which has in turn driven the peak prices we are currently experiencing in the market, with the wholesale cost of energy fluctuating between very high fossil fuel prices and low renewables.
As Rob explained, it is predicted that energy prices will peak this year, then reduce quite dramatically towards 2025 before dropping below current levels by 2025/26. “That’s a forecast based on an organisation investing in renewables on the grid for wholesale, but that will reflect itself in market prices to the consumer. However, it’s highly unpredictable and is driven by a number of factors,” he said.
One of those is the actions taken by government, such as the recent slashing of energy support for businesses. That is going to create several issues. At this point labour and energy costs make the UK potentially less competitive than other European countries such as Germany. Therefore, there is a huge focus, especially from the Scottish government, on wind and alternative fuels which will help drive costs down.
Rob added: “Over the next ten years the UK is planning to build twice as much offshore renewable wind on the grid than we currently have today, and so we should see prices coming down. How the economy evolves will depend on inflation and geopolitical impacts i.e., what happens in Russia, how that impacts the global gas and electricity market and the speed at which those will be passed through to us.”
An evolving landscape?
There are a multitude of ways in which the UK is changing, not least across the energy space. Rob explained that last year, the UK derived the majority of its energy from nuclear and renewables, and renewable energy in general is on the rise. “From 2010 all the way through to 2022 the amount of renewables on the grid has increased and that’s primarily driven by wind,” he said. “Wind utilisation on the grid is specifically driving that increase in renewables, and last year we saw 87% of our energy coming from renewable sources.
“Renewables currently produce 87.2% of total power, but in fact have been producing between 55-59% of all power over the past three to five years. In addition, it is important to note that the cost of these fuels is 50% of fossil fuels such as gas and combined cycle gas turbine (CCGT) plants.”
As price volatility is fuelled by geopolitical and socio economic factors, there has been a significant shift from the gas market to the requirement for renewable energy. And because renewables are primarily owned and operated by funds, many have been cashing in on those high energy prices.
As such, we are seeing an increase in the democratisation of green energy, where investors and government are stepping in to cap renewable energy prices. “Therefore, the increase in renewables on the grid should translate into greener and cheaper energy. And that’s really good news for manufacturers,” added Rob.
Another seismic evolution is around electric vehicles. Unquestionably, they are here to stay, and in December last year, battery electric vehicles outsold any other form of vehicle, making up 32.9% of all vehicles. There is an ongoing and significant shift from energy companies, fuel operators and fleets towards electric as the total cost of ownership is now proven to be around 11% lower than running an internal combustion engine (ICE) fleet. Not all vehicles can be swapped out, but a significant proportion of fleets, cars, LCVs, vans and even buses are now at cost parity or below that of internal combustion engines.
Reducing cost and carbon
Rob explained that the most sound advice for any company looking to lower both their emissions and cost of their energy is to generate their own on-site. He added: “Renewable energy generation will reduce your energy bills, but if you’re not interested in investing your own capital, the market for power purchase agreements (PPAs) – the pence per kilowatt hour guarantee from the assets on your roof for example – is a very rich and growing market in the UK.” In addition, it is also the ideal time for manufacturers to consider replacing any assets which will be coming out of use in the next two to five years with cleaner, greener alternatives.
In addition, by buying renewable energy off the grid manufacturers will be able to secure lower, more forecastable and less volatile prices from energy suppliers that specialise in green energy. And, manufacturers that have large and continuous demand can secure off-site PPA agreements – wind turbines and solar panels – for up to 20 years’ worth of energy pricing, thus reducing the risk of energy prices going forward.
Another key consideration for manufacturers is controlling production in line with cheaper periods and sleeving generation between sites, thus driving down energy use at times when prices are high (early morning and between 4.00-7.00pm). Prices on the wholesale market between those evening hours can be between five and eight times that of energy at other times in the day. Avoiding those periods is therefore key.
And finally, there is a conversation to be had around transitioning to renewable heat. Gas prices are going to continue to stay relatively high but with consistent low to mid-level heat, the case for air and ground source heat pumps is growing dramatically and manufacturers can see significant savings over a ten year finance agreement.
The big wins – near and far
As mentioned, one solution that can be implemented fairly rapidly is electric vehicles – the swapping out of ICE fleets for electric alternatives – and there is government subsidies and additional funding available to help manufacturers achieve this.
Building on that, when manufacturers are discussing their on-site charging infrastructure, they need to make sure they are integrating high quality, open protocol, future-proof technology, and that maintenance is included in those packages. That means the manufacturer does not have to worry about the operation of charge points. “Businesses can see good returns for EV charging, especially in cases where high uptime and resiliency is required from that infrastructure,” Rob added.
Over the longer-term Rob explained that manufacturers with multiple sites need to think about a smarter infrastructure – oversizing renewables on one site where it is possible to do so, versus other sites where, for example, solar capacity would not meet the demand of that site (or indeed, the site has no capacity for solar at all).
He continued: “Sleeving is a financially viable option today and we’re seeing significant savings across the real estate market for that model,” he added. “Think about optimisation and the energy price across the whole portfolio rather than just on a site-by-site basis. You can see significant savings when thinking about generating renewables, sleeving and buying energy all as one model.
“When we’re thinking about our businesses, sites and organisations, we need to move away from the single minded view of an individual site-by-site approach. We can also reap significant benefits by thinking about fleet, battery storage, vehicle charging, grid connections, sleeving between sites and also investment in PPAs and smart products that are utilising price decrease and guarantees from large, utility scale wind, solar and battery storage.”
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