Friday, April 12, 2024

Bounce back from COVID: Business energy in review

Andrew Grover, CEO, Advantage Utilities

With many businesses shuttered for the best part of a year, and many more operating under exceptional circumstances, paying attention to energy consumption has sunk to the bottom of most to-do lists. However, with the rise of new funding models, including power purchase agreements (PPAs), it is becoming easier to make the most out of energy efficiency measures without the risks associated with capital expenditure or the worry of maintenance. With that in mind, taking a closer look at energy consumption may offer many businesses a lifeline to reduce overheads while improving resilience and addressing climate change in the process.

Why now?

All businesses will have explored their energy consumption. Some will have found the cost prohibitive or the return on investment insufficient, while others will have made sizeable investments into low-carbon technologies years ago, and now need to make upgrades. In any instance, with new options becoming available regularly, it pays to make regular reviews. At the same time, the need to address climate change remains and despite COVID-related challenges, businesses continue to act. In fact, a report commissioned by the United Nations found that the number of commitments to reach net zero emissions has roughly doubled in less than a year, as many businesses prioritise climate action in their recovery from COVID-19.

Meanwhile, environmental, social and governance (ESG) investing is predicted to grow rapidly in the next five years. According to research by PwC, ESG funds are expected to increase their European fund market share by between 15 per cent and 57 per cent. The trend will see trillions of pounds become available to fund ESG activities such as renewable energy projects, with investors looking for the best return on their investment. To facilitate these transactions, a new type of contract – the PPA – has been developed which adds yet another way for businesses to finance renewable energy projects on their sites.

Altogether, ongoing technology developments coupled with evolving financial arrangements mean that businesses have access to an ever-increasing array of ways to reduce the costs associated with their energy consumption.

Where to start

The best energy technology solution for any business is one that exactly meets the business’ objectives in the most economical and financially viable way. Before committing to a solution, a business should:

  1. Agree upon and prioritise objectives – do you want to reduce cost, commit to net-zero, make additional revenue, improve security of supply, offer electric vehicle charging to your hotel guests or electrify your vehicle fleet? Every objective has an influence on the final solution.
  2. Identify your team – some companies will have the right expertise in house to take the project forward themselves. Others may prefer to engage an independent advisor to execute the following steps and bring insight from hundreds of previous energy efficiency projects.
  3. Audit your current position and create a baseline – whether you want to reduce energy consumption and costs, or improve your carbon footprint, you will first need to gather the data to assess where you are currently in comparison to your objectives. If working with an independent advisor, they will collate and analyse your data and then create a report for you.  
  4. Consider all the options – the solution needs to account for the type of business that you have including your energy consumption profile, the space you have available, your location and your current energy costs. An advisor will use their expertise to create a bespoke solution from the different technology and finance options available that will most closely meet the business’ objectives.
  5. Think about the future – what fits now, may not do so in the years to come. The business may have strong growth plans that will increase consumption, or ambitions to develop the site or services. These considerations should be factored in. Further, a consultant may be able to offer options that will help to futureproof the business as well as offering the latest advice on aspects such as forthcoming industry regulations, financial support or flexibility market participation.

Financing your investment

Alongside more traditional routes including CAPEX and finance, newer methods to secure investment – namely joint ventures and power purchase agreements – are increasingly being offered for energy technology solutions.

CAPEX route

This route is particularly attractive for cash-rich businesses who are comfortable putting their capital at risk and want to own the asset outright. Businesses financing their renewable energy investments through the CAPEX route receive all of the return on that investment. The business takes full ownership from day one and is responsible for organising maintenance and insurance.  

Finance route

The finance route is particularly attractive for larger businesses who want to own the asset but don’t want to use the CAPEX route. Finance terms will vary but a contract length of between five and seven years is quite typical with the investment becoming cash positive from around year five. Once the finance is paid up, the business owns the asset outright. As with the CAPEX route, the business will be responsible for maintenance and insurance.

Power purchase agreement route

Power purchase agreements (PPAs) are long term contracts through which your business will agree to purchase a set amount of electricity at an agreed price. In return the solutions provider, usually working with an investor, will cover the cost of installing and maintaining your site’s solution for its life span (10 years for CHP & 25 years for solar).

PPAs come at zero capital cost and zero risk to your business – insurance is covered by the funder, and most offer a certain element of hedging against future energy price increases. Recently, the minimum consumption required to attract potential PPA partners has reduced to around 50kW, making it available to smaller premises such as schools, hotels and leisure centres. Consequentially, there has been a significant increase in the number of PPA deals being made with many more businesses now able to reduce their energy consumption, lower their carbon footprint and cut their costs.

Joint venture route

Joint ventures are typically offered by original equipment manufacturers who will offer a fully packaged energy solution on a part or fully financed basis.

There are many ways for businesses to bolster their energy consumption and even more reasons as to why they should. Onsite generation, for example, offers a range of benefits such as reduced costs and reduced carbon as many look to address climate change. Not to mention its potential to offer additional revenue, where technologies such as battery storage and combined heat and power may be used to support the grid with fluctuating energy demand in return for payment. Installing EV charging infrastructure is also an increasingly attractive investment, offering an additional revenue stream and competitive advantage as EV uptake increases.

Businesses are an essential driving force behind reaching the UK and Europe’s net-zero goals. As many look to incorporate sustainability as part of their recovery from COVID-19, others simply look to increase resilience by reducing overheads – the ideal solution will be unique to every business.

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