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Demand for supply is bringing radical change to utilities.


It's increasingly the way that consumers are paying for music, television and software but subscription models could also be set to change the face of the business energy market.

'Energy-as-a-service' - where businesses pay a fixed monthly cost for their electricity and gas as part of a wider package, including areas such as data analytics - is expected to be one of the new approaches to procurement to increasingly emerge as a new landscape for utilities develops.

Much of the change under way is being driven by the shiftto a smarter, decarbonised energy system. The move from the traditional energy system which has existed for decades in the UK to a decentralised and digitised one is providing new opportunities for businesses to change the way they meet their energy needs.

Sustainability issues are also playing a far greater role in how businesses choose their energy, with companies increasingly highlighting their energy buying choices as part of their corporate social responsibility approach.

Although these factors have meant choices around business energy buying have become significantly more complex, price is still perhaps the key factor at a time when wider operating costs such as employment, insurance and business rates are weighing heavily on businesses.

Although wholesale energy costs have recently been at their lowest level for more than a year, Neil Watson, chief executive of Inverness-based energy consultants esave, points out that it doesn't necessarily translate into lower bills for businesses.

"The cost of the actual energy on the markets may be lower but business energy bills are increasingly made up of other charges such as costs to help pay for the network and for renewable subsidies," he explains.

Watson argues that has made it increasingly difficult for companies to assess energy deals to make sure they are getting best value, or at least good value.

"It has become a lot more complex in recent years. Some suppliers split all the charges so they are clear to see and others include them in the overall quote so it is tricky for businesses without internal expertise to know exactly what they are looking at and to compare offers."

Although energy brokers and consultants can help firms secure better deals, Steve de la Rosa, managing director of Glasgow-based utility consultancy Boxfish, argues that businesses need to tread carefully in choosing who to work with.

"There is a real lack of transparency in the sector, with too many rogue operators being able to practice without scrutiny, happy to make a quick buck before moving on to something else," he warns.

"Unfortunately the entire industry has been tarnished as a result,."

Some brokers request that quotes they ask suppliers for on behalf of clients include their commission within the energy tariff, adding a fraction of a penny on top of each unit or getting a sizeable finder's fee from suppliers based on how long they can lock them into a contract.

Commercial confidentiality is quoted to prevent the end user finding out how much money the broker is getting as part of such deals.

Esave's Watson cites the case of a business in Aberdeen he encountered which was spending around PS400,000 a year on its gas supply for a building.

"We met up with them to discuss our services but another broker had offered them a 'free' service and they signed with them.

"From the figures we were told, we estimated they had paid around PS150,000 in commission on the new agreement when a reputable broker would probably have only charged a few thousand pounds."

De la Rosa, who has been a longstanding campaigner for tighter regulation of the sector, says the problem is exacerbated by who is responsible for dealing with utilities within a business.

"In SMEs in particular, where the bill may not be seen as a very significant cost, it is often someone more in an admin function rather than say the financial director who signs it off. That may make it easier for some brokers to get away with things not being properly scrutinised or questions asked," he points out.

Long-term forecasts predict that the growth in demand for electricity will rise significantly in the years ahead as heat and transport become increasingly electrified, putting further upward pressure on bills. A recent report from consulting company McKinsey said electricity demand could even double by the year 2050.

While cost continues to be a significant issue, greater volatility and concerns over security of supply are also emerging as significant challenges amid burgeoning demand for energy and global competition for resources.

A survey of more than 1,000 business leaders by British Chambers of Commerce and Drax found a third (33 per cent) of UK businesses have experienced electricity outages in the past 12 months.

As businesses look to have closer control over their energy supply and costs, new models are emerging for the way they manage and procure 80 INSIDER January 2020 utilities and to take different approaches to budgeting.

Although 'energy-as-a-service' (EaaS) packages, which enable customers to select a monthly subscription to cover their consumption, are still in their infancy, industry commentators believe they could become a significant part of the market in the years ahead.

Instead of charging end users based on how much actual energy they use, customers could select a monthly subscription to cover their consumption depending on likely usage - in the same as mobile phone contracts offer data packages.

Such agreements could not only cover energy but also technology, analytics and access to the grid.

Charmaine Coutinho, head of consulting at Edinburgh-based Delta-EE, which helps clients develop strategies to deal with the transition to a low-carbon energy system, says that although such models are generating a lot of interest, the market is still some way offseeing adoption, particularly for smaller firms.

She says the idea of paying monthly fees with all risks covered by the service provider is attractive but that the need to enter long-term contracts of 10 years and upwards will deter many businesses from investigating further.

"It is hard to see how this type of proposition will succeed without some major shifts in how most businesses and service providers make decisions. Very little has been offered to the SME market in the areas of EaaS. From our perspective they are behind in the sophistication of energy solutions."

Other developments under way in the market mean businesses are increasingly looking at using their energy demand as an asset.

A sizeable proportion of electricity demand in many companies can be flexible through the powering down of some operations or shifting them to a different time in the day. For example, refrigeration equipment in cold stores can often be switched offfor several hours without temperature levels rising too high.

In fact, estimates suggest that up to 10 per cent of the electricity demand of the majority of businesses could be flexible and in many cases a significantly higher proportion.

That flexibility can help smooth out peaks in demand and make best use of the times when power supply is abundant and financial incentives are available to businesses able to agree to temporary cuts in consumption to help balance the grid when required.

Dr Alastair Martin, founder of Edinburgh-based Flexitricity, which has helped businesses access millions of pounds in revenue by respond to shortfalls and excesses in the nation's energy supply, says that with the UK's energy network becoming more reliant on renewable sources of energy, the task of keeping the system balanced is increasingly complex.

He argues that for "smart, active energy users" that means there will be growing opportunities to benefit.

"While there are challenges ahead within the demand response industry, there is also an immense opportunity for organisations to continue to benefit as we work towards a new energy future," he says.

The growth in renewable generation is also being supported by a major shifttowards 'buying green' by businesses.

Sustainability is now a key reputational issue with a growing expectation for businesses to be seen to be doing the right thing on environmental issues.

Campaigns such as RE100, in which many of the world's best-known brands have signed a commitment to switch to 100 per cent renewable energy, continue to gather pace with major Scottish employers Diageo, RBS and Lloyds among the UK firms now involved.

Delta-EE's Coutinho says many businesses are seeing sustainable procurement as part of their "licence to operate" with their own customers, who are asking or pushing for change.

She points out that the "various shades of green" in the energy retail sector include low and zero carbon electricity and offsetting options.

"We think some companies will start pushing for greater transparency on how green the electricity is in the future and start to question more the sustainability of heat and gas supply," she argues.

According to David McGuire of MacRoberts, government policy can have a significant role to play in driving changes in the energy buying choices of businesses and organisations.

He cited a recent PS50m 10-year supply agreement between a group of universities to buy power from renewable generator Statkraft, which operates a number of wind farms from Scotland.

McGuire says that the UK Government's recent adoption of a net-zero carbon legislative target for 2050 was a key driver.

Under the target, the emissions from estates will have to be completely eliminated or, in the most difficult examples, offset by schemes with clear, robust auditing of activity proving removal of CO2 from the atmosphere.

"This shows the critical role that government policy can play in influencing the direction of renewable power development and procurement, especially when combined with private sector innovation rise of sustainability in energy procurement," he argues.

The Scottish non-domestic water market continues to attract new suppliers and there are now more than 20 actively competing for business north of the Border.

Rich Rankin, managing director at Musselburgh-based Brightwater, which entered the market three years ago, says despite the potential savings on offer, many businesses have still not switched provider since deregulation in 2008.

"Much of this is down to the fact that switching won't make a significant financial difference for many small businesses where water consumption is modest," he points out.

"However, there is a need to focus on continuing to educate the business community that switching can bring financial benefits and really enhance the quality of service they receive from their provider."

Rankin says businesses that have taken advantage of competition since deregulation have become much more "switched on" to what's available.

"That means providers need to be on top of their game in terms of offering competitive pricing and value-added services. With pricing January 2020 INSIDER 81 becoming standard across the market, we have found that investing in enhancing customer services, efficiency advice and other added value services has been essential in attracting and retaining customers."

Douglas Reid, managing director of Perth-based business cost consultants MDG Group, says the margins enabled by the regulator in Scotland are large enough to encourage significant competition.

"However, several retailers in the market are operating on very low margins in an attempt to grow their book of business, which they hope to retain in the future when profitability for them can increase," he adds.

"The retailers growing their book of business in this way need deep pockets and as a result there is always the possibility of business failures and more consolidation in the industry."

Reid also says business customers should read their water meter regularly to make sure they don't lose out.

"Several retailers are currently using a business model whereby they invoice their customer in advance of consumption based on estimated usage.

"Many of these retailers use inflated estimates to allow higher amounts to be invoiced in advance. This method is a way of funding their working capital and businesses need to counter this by ensuring water meter reads are taken monthly and submitted to the retailer to ensure payment in advance is minimised."

He also says businesses organising and managing their own water supply contracts need to carefully consider a number of issues.

"These include the appropriateness of the water meter size, the accuracy of the estimated return to sewer allowance being applied and the methodology for checking for water leaks - and if a leak is discovered, the calculation of a water leak allowance."

Although the highly competitive nature of the business energy and water markets means shopping around for the best deal is imperative, the old adage that the cheapest unit is the one you don't use still very much holds true.

Brightwater's Rankin says there continues to be a strong focus across the retail water market in promoting greater efficiency in how customers use water.

Helping customers be more water efficient to save costs is one of the 82 INSIDER January 2020 ways suppliers are able to differentiate their service.

"Most of the high-level consuming businesses will be switched on to this, although there is often potential to make further improvements in areas like effluent and grey water treatment," he says.

"While the majority of Scottish businesses are SMEs with more limited water consumption, the efficiency and environmental agenda is also important. Greater awareness can help reduce wider energy costs across a business and developing a culture around water saving and efficiency also has a positive knock-on effect in reducing waste in domestic water consumption."

Esave's Watson recalls encouraging his business customers at former employer Scottish Hydro Electric about the benefits of energy efficiency more than two decades ago, "Back then, energy efficiency was seen as a sensible thing to do just because it made good business sense to use less energy. Climate change just wasn't on the agenda," he says.

"But now it's more important than ever to be efficient for cost, environmental and reputational reasons.

"Customers and investors will increasing be looking at how the businesses they work with approach their energy and water consumption." | in focus: Corporate PPAs TENS of millions of pounds are to be invested in new renewable energy projects in Scotland on the back of growth being seen in corporate Power Purchase Agreements (PPAs).

Amazon recently signed what will be the largest such agreement in the UK which will support the construction of new wind farm on the Kintyre peninsula, generating enough electricity to power 46,000 homes.

Tesco is also backing two new wind generation projects in Scotland in a deal with EDF Renewables.

The deals follow ones struck by companies including BT, HSBC, Sainsbury's and Nationwide, who have all entered into corporate PPAs in recent years.

Although commonplace in markets such as the US, such agreements have been relatively slow to take offin the UK.

They enable energy buyers to access green energy and fix prices for the long-term by entering agreements typically in place for 10-15 years. In turn, they provide guaranteed long-term revenue streams to enable generators and developers to access finance needed for projects.

The corporate social responsibility and reputational benefits have also been a key driver for business. As well as reducing their carbon footprints, agreements can enable new renewable energy projects to get built that otherwise wouldn't.

Although renewable energy specialist David McGuire of MacRoberts says corporate PPAs appear an easy 'win-win' for both energy buyer and supplier, he argues there are a number of important issues to bear in mind, not least that both sides have to be satisfied that the other will still be around over the length of the agreement.

"The price also has to be right and projections on what electricity prices will do over the next one-to-two years are nothing compared to speculation over what prices will do long term," he points out.

McGuire says the biggest obstacle preventing wider take-up of corporate PPAs - particularly outside major corporates - is that deal terms and contracts are not standardised.

"There is no common ground, everything is bespoke and while the largest corporates can afford the time and expense to implement these, smaller undertakings find the barriers to entry far too high."

There is a real lack of transparency in the sector with too many rogue operators able to practice without scrutiny, happy to make a quick buck Steve de la Rosa, Boxfish (below)Very little has been offered to the SME market in the areas of EaaS. From our perspective they are behind in the sophistication of energy solutions Charmaine Coutinho, Delta-EE (below)While there are challenges ahead within the demand response industry, there is also an immense opportunity for organisations to benefit Dr Alastair Martin, Flexitricity (below)


More than 20 suppliers are now competing for business in the Scottish non-domestic water market
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Publication:Insider Monthly
Geographic Code:4EUUK
Date:Dec 5, 2019
Next Article:2020 brings light to the end of the dealmaking tunnel; COMMENT.

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