Regardless of your business’ size, sector or eligibility for government schemes, your energy bills will almost certainly continue to increase over the coming months and years.
So, faced with the tenth successive year of rising energy costs, how can manufacturers limit their exposure and identify ways to improve their energy efficiency?
To learn more, The Manufacturer spoke with David Oliver, an energy expert from business utility specialists Inenco.
Inenco’s latest report – Winter Outlook: Manufacturers’ energy cost forecast for 2018 and beyond – states that volatility has returned to energy markets over the past 12 months. What lies behind that volatility?
David Oliver: Several different factors lie behind the rise in energy prices businesses have experienced over the past year.
The ‘Beast from the East’ exposed the UK’s lack of gas reserves; the US placing sanctions on Iran pushed up global oil prices, which are linked to gas prices; rising gas prices increased the use of coal throughout Europe and this caused carbon prices to rise. All these are adding to the cost per megawatt – regardless of whether coal or gas-fired power generation.
Inenco’s report highlights that rising energy costs will have a very real impact on the bottom line of all manufacturers, not just energy intensive users. We’ve previously discussed the benefits of adopting a flexible procurement strategy, so what other advice can you offer?
It sounds obvious, but when energy prices rise, the payback period for energy efficiency projects shortens.
Broadly speaking, a lot of manufacturers prefer to invest in projects that deliver a return within 18 months. That might work in some areas, but when it comes to energy, we advise taking a longer-term view. Why? Because the cost of energy is taken off a business’ profits.
Supermarket’s profits are typically around 2% of their revenue. So, if a supermarket chain saves £1m on their energy bills, for example, that’s the equivalent of selling £50m more produce. That’s incredible.
Manufacturers need to seriously reconsider energy payback times and question whether 18 months is reasonable. They should be looking at three, four even five-year timescales. If you were building a new factory, a five-year return on investment wouldn’t represent a ridiculous proposition; why can’t it be the same for energy improvement projects?
Winter Outlook: Manufacturers’ energy cost forecast for 2018 and beyond
Faced with record-high costs and ongoing uncertainty, it pays for manufacturers to reassess their energy risk management strategies to consider how the cost of energy will impact their organisation.
A FREE new report provides a forecast of energy costs over the coming months and compares three manufacturers with and without Energy Intensive Industries exemption and Climate Change Agreements.
Four years ago, many UK businesses undertook government-mandated Energy Savings Opportunity Scheme (ESOS) assessments, which audited the energy used by their buildings, industrial processes and transport to identify potential cost-effective energy saving measures.
However, when the recommendations suggested had three-year paybacks attached to them, many businesses didn’t implement them. Here we are four years later, those businesses are in exactly the same place they were, they didn’t make the changes and if they had, they’d be in profit by now.
Speaking of energy efficiency; how is data helping manufacturers to gain a better understanding of their energy consumption and see where future efficiencies might lie?
Data is vitally important. We still see factories that just have a basic meter installed at the front door and they have no idea what happens to the electricity beyond that. They’re missing out on a far more granular view of how energy is being used across their processes.
Fundamentally, you can’t target energy savings for tomorrow if you don’t know how and when you use energy today.
If you can trace back, say, 50% of your consumption to just one machine and that machine is due for replacement, then part of your investment criteria should be identifying a more energy efficient model. Alternatively, if that machine is only being used for batch processes, could those processes be run off-peak to avoid peak charging bands?
Understanding how much energy you use and when should be the starting point of any energy efficiency or cost-reduction process, because it’s not just about saving kilowatts, it’s also about reducing your pence per kilowatt hour – something which varies at different times of the day or year. That’s about installing sub-meters across the site, and then analysing that data to produce actionable insight.
More and more organisations are also going down the route of ISO 50001 which supports them in using energy more efficiently through the development of an energy management systems (EnMS), but even manufacturers who aren’t ready for that yet can work with someone to help them monitor and manage their energy better.
I recently attended a lecture by a Cambridge University professor who noted that because the UK pays quite a lot for energy, businesses have become very good at using it efficiently. As such, the opportunities for further efficiencies are limited. Would you agree with that?
Absolutely. There is always going to be low-hanging fruit, as you would expect there to be for any project. For energy, these are simple things like upgrading your lighting to a more efficient, motion-activated LED system, perhaps, or adopting variable speed drives.
Those are steps you can take on day one and you’ll probably see a return with 24 – 36 months, depending on the business. For operational changes the capital investment may be minimal with paybacks measured in months.
Identifying the next step means looking deeper and harder at your business’ energy consumption and start exploring projects with a longer payback period. One of the most beneficial aspects of ISO 50001 is that it gets you to continuously look for opportunities. For future efficiency or cost-savings.
One of the big retailers that we work with had a very ambitious energy reduction programme and from day one everyone agreed that the first couple of years were going to be okay because the low-hanging fruit was easy to spot.
Beyond that was more challenging, however, energy prices had risen so much during those first two years and the cost of technology had come down so far that those longer-term, more expensive projects suddenly seemed more achievable, and in fact they even met their targets a year early as the markets continued to move while their efficiency programme progressed.
Given the current energy volatility and uncertainty regarding the Brexit deadline, more manufacturers are re-assessing their energy risk management strategies. If you’re thinking of doing the same, the three pillars of a good energy risk management strategy are: flexible procurement, energy efficiency and demand management.
How will the Budget affect your business energy costs?
The Chancellor’s speech may have made little mention of anything energy-related, but the government documents that were subsequently released offer some insights into the UK’s energy future.
The Manufacturer sat down with Inenco’s David Oliver to discuss how the Budget will affect industrial businesses energy costs and commitments.