2013 Energy Report - Burning issues

USA is enjoying a bonanza of cheap energy thanks to huge new supplies of natural gas, recovered from shale through fracking. Yet here we are, after three years of substantial price rises, on the brink of an energy crisis. Under EU agreements to reduce carbon emissions, nine UK coal and oil-fuelled power stations will close this year. A single gas-fired plant is being built. Nuclear plants that produced a fifth of our energy are already shutting down while contracts for their replacements haven't even been awarded. And other renewables won't be plugging the gap for years, if ever. Meanwhile, Ofgem warns that our falling generating capacity will mean more energy imports and price rises. And, with sterling steadily losing value against the euro and the dollar, imports could cost even more. No wonder, according to the findings of WM's Energy Report, there is a clear and growing disquiet about the government's energy strategy. Let's be fair: in our survey of 100 site managers, 40% give qualified support to the goal of a low-carbon economy. They are, however, vastly outnumbered by those with little confidence in the current strategy or even those who openly assert the government hasn't got a clue. Several voice fears that its policies are driving multinationals and energy-intensive manufacturers offshore. There are widespread complaints about the sheer volume and complexity of new legislation; not just the imminent carbon floor pricing but also the climate change levy (CCL), CHPQA programme and – most resented of all – the CRC energy efficiency scheme. "The carrot and stick method may have stood a chance of success. Now it is just another revenue stream," comments one. Another respondent speaks for many: "Offer tax incentives for using energy recovery systems… rather than penalising [us] for not doing so. This would have less impact on businesses' viability, and competitiveness will drive it through industry." It's a common theme; instead of the Department of Energy and Climate Change (DECC) beating industry into submission through punitive taxation, many would welcome not just financial incentives but technical help in investing in energy-efficient equipment. They want more transparency on energy subsidies, less bureaucratic initiatives, and perhaps support from not-for-profit regional champions. Food for DECC thought? Industry is hurting: 72% have seen their energy costs rise, more than 12% up on last year. And not small fry either – 15% are up by 10% or more and a third between 5-9%. But how does that compare with our European backyard? DECC's figures contain surprises: in Q1/Q2 of 2012, UK industrial electricity prices were the fifth highest in the EU 115 – and way above key competing nations like France and Sweden – but our gas prices were the lowest. That advantage is unlikely to last. Manufacturing is still conservative in its buying methods, or perhaps justifiably untrusting, given Parker Hannifin's experience of invoice checking (see box, p22). Well over half buy on a fixed price, the majority on an annual basis. Only 10% contract over three years, despite the energy companies' insistence on the value of predictability and – a marked change from last year – none risks a longer contract. The main driver for energy purchasing decisions is the end of the current contract; 39% against 28% that operate a defined risk management strategy and 21% motivated by rising or – much rarer – falling prices. Hikes in electricity prices hurt even more than gas. A surprisingly small number – some 7% – are investigating co-operative buying. Yet this could be a golden opportunity for smaller energy users. According to DECC's latest Quarterly Energy Prices (December 2012), the difference between a small and a large buyer can be as much as 2.69p per kWh for electricity and 1.44p per kWh for gas. Similarly, fewer than a quarter generate energy for their manufacturing processes on-site. CHP (combined heat and power) is a big investment but solar panels, small wind turbines, etc, aren't usually budget breakers. A Magnificent Four – who meet 100% of their processes' energy requirements on-site – show what can be achieved. Nevertheless, the majority are riding the storm, largely by pursuing new, more efficient ways of cutting energy use. The obvious, fairly painless things feature highly on the list: more efficient heating/lighting systems and a sharper focus on those insidious energy-swallowers, compressors and fixed-speed drives. More are planning to replace inefficient production equipment like boilers, or investing in CHP and even anaerobic digesters. And plant maintenance is clearly climbing up the popularity ratings; it's now a priority for half the businesses. Entek is not alone in counting reliable equipment performance as key in driving down energy costs. Even more interesting is the drive for employees' involvement, often formalising energy awareness as an expected behaviour. Well over half the manufacturers see it as crucial while 35% include it in their staff objectives. Clearly, we are gradually moving away from nagging reminders to turn off the lights and into wholesale culture change. Will that be enough if prices continue to climb? The good news is that not a single business thinks it will be pushed into closure or headcount reductions to absorb future rises. Only one in ten will be passing the costs to the customer, leaving nearly a quarter to absorb them by cutting operating profits and a confident 65% looking to offset them by more energy efficiencies. That's not as optimistic as it sounds: over half think they've got a lot of wastage. In fact, the number patting themselves on the back for minimal energy waste has fallen by nearly 10% while more rate themselves as fair rather than good. There's plenty to go at, then. Whether businesses will know when they've got there is another matter entirely. Although over 60% have included energy-related opportunities in their business strategies, some 30% haven't even got a route map, let alone a target. And ambitions are hardly unreachable – most are in the range 1-9%. Although many sites are nervous about their ability to meet energy targets, there has been one important development. Last year, one in 10 doubted the board would back them in necessary changes; this year only one unfortunate soul expects to be out in the cold. The discrepancy between passive approval and active strategy, however, still indicates boardroom focus could be sharper. Reluctance to spend on improvements is currently seen as the biggest obstacle to hitting energy targets with widespread doubts about the difficulty of calculating payback periods and lack of staff resource to plan, perform and measure the effects. But at least the energy champion is now an established role in over half the sites. What's more, nearly 90% are doing the groundwork by measuring their energy use, although only 14% use external expertise. The current picture is one of businesses coping rather than hanging on by their finger nails but apprehensive about what the future may bring. And for some, Room 101 is just around the corner with the April arrival of the Carbon Price Floor mechanism. Although there is tepid support for its objective of stabilising carbon prices, nervousness is apparent at every level and sheer fury at some. Almost everyone who's looked at it anticipates it will add between 1 and 19% to costs, and one in five thinks it is an unnecessary scheme that will really harm the business. Worryingly, however, nearly a third didn't even know it was happening. Nearly 80% would support a campaign for manufacturing's exemption from the scheme. If the government comes in for stick, energy suppliers attract a whole forest. There is a clear wish for the regulator to take a firm hold of them and their charging policies, preferably by the throat. The opacity of current tariffs comes in for particular criticism. One respondent would like to see the proposed change to clear price comparisons for consumers mirrored in the industrial market: "It would allow more time to concentrate on improving and building the business rather than investigating different tariffs or negotiating via agents that need to earn their margin." More than anything, however, the WM Energy Report shows how much manufacturers crave certainty that their energy needs will continue to be met in the future. There is a pronounced view that the government should stop loading industry with the costs of renewable power generation and instead aim for self-sufficiency. And for many, that means getting on with building nuclear power stations. As one said, without this, "we will be held to ransom by foreign providers such as gas from Russia or nuclear from France". Perhaps DECC ought to be looking hard at the way it talks to industry and, even more importantly, how it listens.