Spiralling energy bills? A quick guide to help businesses cut costs
The rapid rise in energy costs over recent months is concerning for businesses of all sizes across all sectors of the UK economy.
The announcement of the Energy Bill Relief Scheme in September was a welcome lifeline, but the reality is bills will continue to be far higher for the foreseeable future than they were at the start of this year.
In this quick guide we explain the Energy Bill Relief Scheme, how it will impact businesses, and what other steps businesses can take to bring down their energy costs.
What is the Energy Bill Relief Scheme and how does it work?
The scheme is a government-backed discount on energy prices for non-domestic energy users, which works in a very similar way to the Energy Price Guarantee for domestic consumers. The scheme applies to businesses, voluntary sector organisations such as charities, and public sector organisations such as schools and hospitals who are on certain fixed price contracts, deemed or variable tariffs, or flexible purchase contracts.
It is important to understand that, despite the scheme being widely described as a “price cap”, it does not actually cap the monthly bills a business will pay. Instead, the government will provide a discount on the wholesale element of gas and electricity unit prices, which means that component of the bill will be lower than it would otherwise have been (but not necessarily reduced to 2021 levels). However, the total amount of the bill will still depend on the business’s actual usage and other costs such as network charges, which can vary year to year.
Energy suppliers will automatically apply the discounts to the bills of all eligible business customers.
How else can you lower your energy bills?
Having a proper energy procurement strategy can pay dividends.
Procuring your energy supply contracts through brokers or third-party intermediaries (TPIs) won’t necessarily lower your energy bills, because commissions (paid by energy suppliers to brokers/TPIs) are often built into the supply contracts (i.e. passed on to you, the customer). If you use a broker or TPI, ask them for a detailed breakdown of costs and charges, including any commissions, so you understand exactly how much you are paying for your energy and other mandatory charges (e.g. network charges), and how much is commission.
Commission may be payable on each unit of energy supplied over the entire term of your supply contract, in which case it may be significantly cheaper to simply pay your broker/TPI a one-off fee for advice and/or for procuring quotes on your behalf. You can also approach energy suppliers direct to compare costs and avoid brokerage fees/commissions altogether.
If you buy green electricity, it is also worth checking that what you are buying is genuinely green (sourced by your energy supplier from renewable generators) rather than brown power (non-renewable) with green certificates stapled to it. In the latter case you may be paying a green premium for electricity which isn’t truly green.
Energy efficiency and demand reduction
Businesses should seek to couple a strong energy procurement strategy with measures to improve energy efficiency, particularly in relation to heating and lighting. The Energy Savings Opportunity Scheme (ESOS) already requires large organisations to undertake a mandatory assessment of their energy usage every four years and to identify new ways of saving energy; however, more frequent assessments, coupled with swift and robust mitigatory action, could yield significant cost savings for businesses.
Additionally, businesses should not underestimate the potential savings which could be made by demand reduction at the individual premises level, for example through:
- office/building managers regularly conducting housekeeping walks to identify opportunities for energy savings (such as shutting windows, turning off lights, unplugging electrical devices), reporting maintenance issues and ensuring swift resolution, and identifying any unfavourable staff behaviour; and
- ensuring employees are actively engaged in reducing energy usage by issuing regular communications in relation to problematic behaviours such as leaving doors open during heating season or leaving lights, computers and photocopiers switched on.
Reliance on electricity from the grid (and exposure to increasing wholesale market prices and volatility) could be reduced or avoided altogether through the installation of generation assets on your site – ideally lower carbon/higher efficiency assets such as solar panels, heat pumps, battery energy storage systems (BESS) or combined heat and power (CHP) plant. The upfront costs of these types of assets are continuing to fall, although the overall cost of installation will vary depending on the type and size of asset selected.
For businesses looking to avoid upfront capex, third party funding is an option. The third party provider would be responsible for financing, procuring and installing the equipment and would own and potentially operate and maintain it thereafter. It would typically recoup its expenditure by charging the business for the generated energy through a power purchase agreement (PPA). The price for electricity supplied via such a PPA tends to be lower than grid, and the term of the PPA can be fairly long (often between 5 and 15 years) thereby fixing the price and insulating the business from wholesale price volatility.
On-site energy generation also serves to enhance security of supply.
Corporate power purchase agreements
If a business does not have suitable space for installation of on-site generation assets, it can seek to buy energy direct from a generator via a corporate PPA. This is becoming increasingly popular in the renewable energy market where businesses buy electricity direct from solar farms or wind farms, thereby securing fixed price energy over a relatively long term (in the same way as on-site PPAs) and also bolstering their ESG credentials by buying green.
Sometimes the electricity is supplied directly from generator to consumer via a private wire (i.e. a privately-owned cable physically linking the two) but where that’s not possible, it can also be supplied via the grid using a sleeving arrangement. The business consumer still benefits from fixed price green electricity.
Demand side response
Businesses can also make (as well as save) money by reducing their energy demand or otherwise providing flexibility to the grid. For example, if a business can turn down its energy demand for a period of time (even a few minutes) when asked to do so by National Grid, it can receive a revenue via a service called Demand Side Response (DSR). DSR and similar flexibility services help National Grid to manage supply and demand on the national electricity system, for instance when there is particularly high demand (the classic example is half time of the FA Cup final when many people around the country switch on their kettles at the same time) or a large generator unexpectedly goes offline leading to a shortfall in supply.
In a similar way, any business which operates electric vehicles can use the vehicle batteries to provide flexibility services to National Grid when the vehicles themselves are not in use – for example, where fleets of light commercial vehicles are plugged in overnight and are not required until morning. A special bi-directional charger is required, but otherwise the process is relatively simple. It is known as vehicle-to-grid or V2G and, again, is a paid-for service.
Some businesses receive their hot water and/or space heating via a district heat network (rather than generating their own heat using a gas boiler). This can come with the benefit of fixed price heat (in much the same way as on-site/corporate PPAs offer fixed price electricity) and can also be more efficient than conventional heating.
Energy users connected to district heat networks cannot directly benefit from the government-backed discounts mentioned above, although the government has asked heat network operators to pass any benefit on to their customers. However, unless/until this is mandated, we recommend that district heat customers engage with their providers and review their heat supply agreements to determine whether there is any contractual requirement for savings to be passed on.
How Freeths’ clean energy team can help
The measures outlined above have the potential to significantly reduce energy costs, as well as providing additional benefits such as improving security of supply, reducing carbon emissions and enhancing green credentials. However, there isn’t a one-size-fits-all approach and different measures will be right for different businesses. Trying to secure the best value energy can be a complex and daunting task, but the Freeths energy team is here to help.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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