On the right side of the law30 April 2018
Understanding the current energy legislation and, more importantly, realising business benefit from it, is more important than ever before. Ashley Phillips, director of Ørsted UK, explains more
In a world where control of your cost base can spell competitive advantage – or disadvantage – it’s always important to keep a close eye on efficiency. As ever, minimising overheads, while maximising output, is the name of the game. Energy is one of the most significant overheads for manufacturers, with many factors affecting commodity prices. Legislation is all-important when it comes to energy costs and reporting obligations. But unless a business has an energy specialist in the team, it can be easy to miss opportunities to reduce costs, take advantage of tax breaks – or to know what your long-term energy budgets should look like. Knowledge is definitely power when it comes to gaining an energy advantage.
Adapting to a changing energy system
As a nation, we are decarbonising energy production to help us meet the UK’s carbon reduction targets. When it comes to electricity, we’re moving away from coal generation to using sustainable resources, such as wind and solar, to provide more of our electricity. We’re also decentralising our electricity infrastructure. So, rather than relying on a handful of coal-fired power plants to provide the majority of the country’s electricity, many hundreds of assets are contributing, including businesses participating in demand-side response schemes – sharing the rewards and spreading the risk.
As we transition to a more sustainable energy future, the make-up of energy bills has also changed. A decade ago, we would have expected the cost of electricity commodity to outweigh the non-commodity costs (made up of system, network and policy costs). That balance has shifted considerably. In 2014, electricity bills were roughly half commodity and half non-commodity, whereas the Department for Business, Energy and Industrial Strategy (BEIS) predicts that the proportions will be closer to 60% non-commodity in 2020, rising to 70% in 2030 (http://bit.ly/2FTNwI4). Gas costs are less affected by policy, but commodity costs can be influenced by depleted reserves during unexpected spells of cold weather, as we have witnessed recently. As with electricity, it makes sense to have a clear strategy in place to manage costs during this period of change.
As energy bills increase, it pays to take a smarter approach to energy management. Time of use will be an important factor in cost reduction for many businesses. Alongside this, some manufacturing businesses qualify for exemptions from certain electricity costs (replacing the existing compensation mechanism), with qualifying intensive users expected to benefit significantly as a result of those exemptions through to 2020. With such savings opportunities available, it’s certainly worth checking whether your business qualifies. In addition, any business able to change their usage patterns can earn revenue from Demand Side Response (DSR) schemes.
With so many variables to consider, and so many opportunities out there for the taking, it’s vital that manufacturers are familiar with changes in the field of energy policy. Here’s an overview of some of the key changes taking place.
April: a month of change
This month is important when it comes to energy budgeting and that’s because several non-commodity charges either change or are reconciled every April.
In 2018, businesses can expect to see increases in CfD and Capacity Market charges. Both are linked to ensuring that the country always has enough generation available to meet forecasted demand. Demand forecasts are reviewed each year and an auction is held to fill any gaps identified. In holding an auction, BEIS expects that costs to the consumer will be minimised.
Added to this, Feed in Tariff (FiT) and Renewables Obligation levies are also due to increase. Both are designed to support smaller scale renewable generation, such as domestic solar installations and commercial on-site renewable generation.
System charges are also updated in April, with the most notable change this year concerned with Distribution Use of System (DUoS) charges. DUoS charges contribute to the cost of maintaining the regional networks that transport electricity from local substations to the end user.
Up until 1 April 2018, DUoS charges have varied significantly depending on time of use. For instance,
using electricity at peak periods, such as the end of the working day, has been significantly more expensive than consuming at times when demand is much lower: overnight, for example.
From April 2018, the charging structure has changed, so that the peak periods are less expensive and the off-peak periods are more expensive. For manufacturers that actively avoid the 4pm-7pm period, this may mean an overall increase in DUoS costs.
Support for energy-intensive industries
Because energy costs have risen in recent years, and are set to continue, there is a recognition that those costs have adversely impacted some sectors that use energy intensively in their processes. As a result, exemptions are available for those businesses most affected, to support them where they regularly face global competition. A wide range of sectors are eligible, including iron and steel, plastics manufacture, ceramics, electronic components and chemical manufacturers, to name a few.
Compensation has been available for Renewables Obligation, FiT and CfD since 2016, with exemptions due to start this year. Eligible sectors must apply and no backdating is allowed under the scheme rules. BEIS anticipates that those businesses eligible for the full exemption package will be £380,000 better off under the new scheme. Manufacturers of all sizes are advised to check whether their business qualifies for any exemption and ensure that they have all the details needed available as soon as the exemption process opens. BEIS is consulting on widening the exemptions to other sectors, making it one to look out for.
For businesses willing to invest to reduce overall consumption, enhanced capital allowances are available for designated energy-saving technologies. First Year Tax Credits for energy-efficient technologies are also increasing to two-thirds the rate of corporation tax, making energy reduction a viable option for more businesses.
Good to keep on your radar
On 1 April 2018, a new regulation was introduced, affecting all businesses with half-hourly (HH) metered electricity - which in practice, is most businesses. Known as DCP161, it brings in new penalties for those businesses that exceed their pre-agreed electricity capacity limits for their site (also known as Maximum Import Capacity). With this in mind, it’s important for manufacturers to check their capacity limit with their supplier and determine whether that limit might need to be changed to avoid excess capacity charges, based on usual business activity and future requirements.
The Climate Change Levy (CCL) is also due to be rebalanced between electricity and gas, reflecting the changing fuel mix in the UK. Essentially, this means that the cost of gas will rise slightly as CCL for gas goes up. The Carbon Reduction Commitment Energy Efficiency Scheme (CRC) will be abolished from 2019 and CCL rates will rise to recoup the lost tax revenues from CRC, while relieving the reporting burden associated with the scheme. CCL rates for 2020-2022 will be set in Budget 2018, providing useful insight for those responsible for planning energy budgets.
There are certainly plenty of considerations for any business when developing an energy budget and strategy, but one thing is certain: electricity and gas prices will continue to rise. Exemptions for energy-intensive users are certainly welcome, but to continue to drive down overheads and improve competitiveness a more strategic approach to energy is required.
Some tactics that can be adopted by manufacturers looking to realise this approach include:
● Flexible purchasing: Commodity costs may form
a diminishing proportion of the energy bill, but they are still significant. Opting for a flexible purchasing strategy enables businesses to better take advantage when commodity costs are lower, rather than paying a premium to have a fixed unit cost throughout the year.
● Checking schedules: Reviewing your approach to scheduling can also make a big difference to your energy bill. By reducing consumption during peak periods and – where possible – switching to on-site generation when commodity costs are particularly high, you can really lower your costs.
● Flexibility solutions: More companies than ever are getting involved with DSR and other flexibility schemes. These schemes pay businesses to reduce their usage during particular periods to help balance the electricity system. In return, the business receives a payment. With flexible business consumption an increasingly vital part of our evolving energy system, why not see how your business could tap into this revenue opportunity?
● Energy reduction: Using less energy is core to any energy management strategy. Many businesses will have already implemented the simple measures and `have guidance from their 2015 Energy Savings Opportunity Scheme (ESOS) assessment report, indicating where they can achieve the most significant savings. With enhanced capital allowances available for some energy-saving technologies, it’s worth taking another look to see whether your business could benefit.
● Complete solutions: Undoubtedly, the best results will come from a multi-faceted energy strategy, but this can feel a little daunting for some organisations whose focus is, understandably, centred on core business. I strongly recommend working with a third-party to identify an appropriate strategy and implement it successfully.
For busy manufacturers, it can feel as though there is a mounting number of variables to manage, in order to optimise operational efficiency. As part of this, getting ‘under the skin’ of energy legislation can seem a daunting task. But with some forward-thinking and application of expert knowledge, it can work to your advantage, clearing a free path to a more sustainable energy future.
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