Ofgem’s recent warning that the margin of spare capacity on the network will reduce from 14 per cent today to 5 per cent by 2015 has caused a stir in the energy industry. Talk of energy rationing and the “energy gap” are widespread.
As a business that helps organisations to manage energy more efficiently, this comes as no surprise. There are two tectonic plates clashing over the next few years, and predicting exactly what will happen is increasingly difficult – even National Grid has moved away from a single best estimate to a range of scenarios.
So what are these tectonic plates? The first is the Government’s target on climate change – namely: To produce 30% of electricity from renewable sources by 2020; to cut greenhouse gas emissions by 50% on 1990 levels by 2025 and to cut greenhouse gas emissions by 80% on 1990 levels by 2050. The second is the continued and steady decline in UK oil and gas, with ever increasing reliance on foreign imports of energy (the UK is already a net importer of energy).
These two major changes to the UK’s energy landscape are making future supplies harder to predict, bringing an increased risk of getting it wrong. But will the government allow the lights to go out – I very much doubt it. More likely is that the economics of generating energy will not be quite as predicted – and no guesses who will pick up the bill.
Ofgem is predicting that the percentage of electricity generation from gas will rise to between 60 and 70 per cent by 2020 from 30 per cent today. On this it states: “The big worry about gas for all consumers is what price will we have to pay to get it? Because just when we need more gas, world demand for gas is set to rise while our own supplies are predicted to fall by another 25 per cent by 2020″.
In addition, in the UK and throughout Europe we see an increasing proportion of energy bills ear-marked to fund green energy initiatives. No amount of switching supplier will avoid these costs as they are usually linked to consumption and uniform across the industry. That leaves just two options for businesses and consumers alike to reduce costs: Self-generation and energy efficiency.
The economics for self-generation are often not palatable. For example, thanks to significant decreases in schemes such as Feed-In-Tariffs (FIT), the payback on solar PV is typically so long that it falls outside what most businesses’ consider to be an acceptable return. Other schemes using the Renewable Heat Incentive (RHI) can deliver more acceptable returns, but biomass boilers, ground source heat pumps and the like are sometimes not practical solutions for many businesses.
So that leaves energy efficiency as a key tool that businesses could and should be implementing with more rigour to protect themselves from future energy uncertainties. For example, according to DECC, in the service sector approximately 75% of energy is consumed by just three areas: heating, lighting and hot water. In all three areas, businesses can take some quite simple and cost-effective measures to reduce consumption.
The Government has recognised that it must act to encourage a greater take up of energy saving technology. Businesses need the appropriate tools and independent advice to make meaningful contributions to the on-going ‘energy gap’ challenge. Doing nothing is no longer a sensible option.
Ofgem’s warning brings clarity to the challenge we all face and underlines the need for a concerted drive towards energy efficiency. Whether or not you believe rationing is a likely scenario, businesses that take action sooner rather than later will be better able to weather the storm.