UK organisations should take action to reduce their non-commodity costs, says Inenco

While wholesale energy costs are affected by many unpredictable factors, making it difficult to forecast whether they will go up or down, it is far more certain that non-commodity costs will rise. David Oliver, a consultant at Inenco, discusses the increases that organisations can expect if they don’t take action to reduce their non-commodity costs, based on research that the company has recently carried out.

Most UK businesses can expect to see their energy costs rise by 25 per cent by 2020 – and we know that non-commodity costs (the fixed price per kWh on a business energy bill) will make up a significant proportion of this increase. For example, in 2017/2018 alone, the Renewables Obligation (RO) Levy, the Feed-in-Tariff (FiT) Levy, the Contracts for Difference (CfD) Levy and the Climate Change Levy (CCL), coupled with carbon floor costs, will add around £41/MWh (4.1p/KWh) to an energy bill*. Furthermore, we have recently calculated that UK organisations combined can expect to have paid an extra £7.42 billion on their energy costs by 2019 if they don’t take action to manage their consumption.

The good news is that, while wholesale energy costs are beyond an organisation’s control, non-commodity cost rises can be mitigated through using energy management strategies.

Investing in energy management can of course seem like a daunting task, especially if you don’t know whether the time and effort involved will really deliver savings, or which options will achieve the best outcome. So, to help organisations choose an appropriate course of action, we investigated the impact of continuing along the same path (inaction) versus implementing a range of measures to manage energy consumption, analysing data from a typical large retail park, a small retail store, a manufacturing site and an inner-city university.

We calculated the energy costs rises these organisations would face over a three-year period (2017-2019) if they kept the same energy strategy or applied the following scenarios: 1) reduce overall consumption by 10 per cent, 2) shift 20 per cent of consumption from Red bands and distribute across Amber bands, 3) shift 50 per cent of consumption from Red bands and distribute across Amber bands and 4) implement an energy efficiency programme (aiming for a five per cent reduction year-on-year).

In all cases, two of the scenarios had the most impact compared to inaction; shifting 50 per cent of consumption from Red bands and distributing across Amber bands, and implementing an energy efficiency programme.

In the case of a large retail park1, implementing an energy efficiency programme would result in a rise of just £15,985, or nine per cent. If large retail parks don’t take action to mitigate non-commodity cost rises, they can expect an increase of 27 per cent, or £47,561.

Meanwhile, for a small retail store2, shifting 50 per cent of consumption from Red bands and distributing across Amber bands would keep bill rises as low as £1,127, or two per cent, and putting an energy efficiency programme in place would result in a rise of £2,875, or four per cent. Failing to take action would result in a rise of 21 per cent, equating to £15,486.

In the case of manufacturing3, executing an energy efficiency programme would see energy costs rising by 29 per cent, or £548,057. If manufacturers don’t take action to mitigate non-commodity cost rises, we estimate an increase of 51 per cent, or £950,057.

For inner-city universities4, bill rises could be kept as low as £7,038 and £7,835, or three and four per cent, by shifting 50 per cent of consumption from Red bands and distributing it across Amber bands, and introducing an energy efficiency programme, respectively. Taking no action would result in a rise of 21 per cent, equating to £43,501.

Combining the scenarios used in our calculations would maximise the savings, especially as shifting consumption can earn organisations revenue through demand management schemes. However, the ability to do this will depend on the organisation; it’s not always practical, for example, to shift 20 per cent or 50 per cent consumption. Implementing an energy efficiency programme is an action that all organisations can take though, and it keeps cost rises low.

With energy costs increasing, and continuing to rise well into the future, organisations will understandably be looking to mitigate the impact on their bottom line – and our research demonstrates that they cannot afford to stand still and carry on as before. Investing in an energy management strategy can pay dividends, with costs increasing by just two per cent in some cases.

The first step a business or organisation should take is to review current use and projected energy costs, and to establish whether there is adequate internal resource available to successfully implement an energy management strategy. The second step may require engagement with external consultants to determine which solutions are most appropriate.

Inenco’s Cost of Inaction report can be downloaded at www.inenco.com/the-cost-of-inaction. In addition, its interactive Non-Commodity Cost Dashboard can be used to calculate exposure to incremental non-commodity costs over the coming years.

For further information please visit www.inenco.com.

*Excluding businesses in energy intensive industries

1Based on a large retail park in the East Midlands, 3GWh annual consumption, HV, in CRC

2Based on a small retail store in North Wales or Merseyside, 1GWh annual consumption, LV in CRC

3Based on a manufacturer in Hampshire, 50GWh annual consumption, HV, in a CCA (so exempt from CRC)

4Based on a university in the North East (Leeds or York), 3GWh annual consumption, LV in CRC