The role of Large Energy Users (LEUs) in the energy transition
Major organisations across retail, telco and media, water, infrastructure, industrial, financial services and technology are significant consumers of electricity. Baringa research found that the UK’s top 30 LEUs consume circa 10% of the annual Business to Business (B2B) electricity demand (~200TWh); and many of these organisations also have global operations.
As the energy sector moves to distributed energy solutions and decentralised energy generation, as fewer subsidies for new generation projects become available, and technology costs fall, UK Government’s role in balancing the energy trilemma (security of supply, affordability and low carbon) is diminishing. In the next decade, market forces, technology, data and business model changes will drive the transformation of the energy industry, and LEUs will play a key role in this transition. As credit-worthy counterparties, great opportunities open up for them to review, take control and develop a sustainable energy strategy that leads to lower costs, a lower carbon footprint and increased certainty.
LEU’s energy strategies influence the way organisations work today in their current geographies, and how they expand into new geographies. Done well, these strategies can create value and provide a level of competitive advantage, but this is not without some challenges, particularly with regards to their energy spend.
The challenge: spend and resilience vs. 100% renewable
Energy spend – driven by consumption and price – is, and will always be, a critical factor influencing energy procurement decisions. Having a robust understanding of today’s and future consumption levels, supported by good actual and forecast data, is critical. This is a challenge for many LEUs, particularly for rapidly expanding ones. The price of energy is the other driver of spend, and is made up of two elements: wholesale costs and non-energy costs, approximately 40-45% and 55-60% respectively. GB wholesale costs are projected to increase into the medium term, primarily driven by rising gas and carbon prices, with some flattening in the longer term due to increasing renewable and interconnection capacity. Non-energy elements within LEU’s energy bills, such as network investment and renewable levies are for the most part non-controllable, in turn creating additional, significant cost exposure.
Besides absolute energy spend, LEUs face increasing challenges in ensuring resilience, i.e. delivering reliable, regular supply of energy, especially for mission-critical operations. For LEUs operating in mature power markets, resilience can mean avoiding exposure to peak pricing, whereas for those operating in less established markets, where grid supply can be intermittent and black-outs common, avoiding the impact of these events on the core business is an important theme.
Following the COP 21 Paris Agreement, many LEUs have faced pressure from stakeholders to decarbonise and demonstrated their commitment to 100% renewable energy by participating in the RE100 initiative. Delivering on this commitment is a challenge for many, requiring a trade-off between zero carbon and lowest cost, and potentially diverging from the overall corporate strategy.
Energy managers can find it difficult to articulate the complexities of the energy cost base, and the impact of energy purchasing decisions on resilience and the organisation’s operations.
The three levers LEUs can pull
To get on top of the spend and resilience vs. renewables-challenge, we typically see LEUs pursuing a combination of ‘Buy Less, Pay Less and Consume Less’-strategies. For this to work, it is crucial to have a clear understanding of energy consumption, cost exposures, and risk appetite, and to align the energy strategy with the wider corporate strategy. This alignment is critical to secure the necessary executive buy-in and funding, but also requires decisions on the correct delivery model and the appropriate mix of solutions.
Energy management hierarchies frequently start with ‘Consume Less’ initiatives such as replacing inefficient or aged assets, prioritising use of the most energy efficient plants and culture change programmes focussed on energy efficiency behaviour.
‘Buy Less’ initiatives are the opportunity for LEUs to use their operational sites and buildings to embrace the wide spectrum of technologies and solutions for participation in low carbon power and storage investment. LEUs now have the choice to either invest their own capital, or engage third parties to optimise operational energy spend on their behalf, through the deployment of onsite generation assets or balancing technologies (demand side response, battery storage).
Finally, ‘Pay Less’ initiatives allow LEUs to meet ambitious sustainability and renewable energy procurement objectives through improved power purchase agreements (Corporate PPA’s) with generators. New, subsidy-free projects of mature technologies such as onshore wind and solar PV are increasingly competitive against wholesale electricity prices. Our experience indicates that subsidy-free CPPA projects can deliver significant annual average cost savings and the debate now is how ambitious the savings targets are and how to best balance the requirements of LEUs with those of generators.
The opportunity for LEUs
As credible, credit-worthy counterparties, LEUs can play a key role in accelerating the decarbonisation of the grid through connecting capital and projects to create investable structures and contracts for new projects, whilst at the same time delivering cost savings, carbon reductions and cost certainty for its own organisation.
We are seeing this happen at an accelerating rate, providing real opportunity for LEUs to create energy strategies that will deliver benefits – with an acceptable risk profile. And in addition, this also gives LEUs a programme to demonstrate to their customers that they are taking their commitment to a low carbon future seriously.
Our next blog looks at corporate sourcing of renewable power, and assesses the benefits to both LEUs and generation asset owners of corporate Power Purchase Agreements (PPAs)
About the authors:
Jonathan Roberts is a Director in Baringa’s Energy and Resources team. He is an infrastructure professional with over 20 years’ experience working across Europe and Oceania. He works with corporates, developers and investors to create commercial value and manage risk across the energy infrastructure lifecycle.
Ben Heininger is a Senior Consultant in Baringa’s Energy and Resources team, helping clients generate value by providing commercial advice on their renewable energy strategy. He has recently been helping retail and telco clients with Corporate PPA strategies in the UK, Europe and Africa.