EY UK Energy blog
Can businesses buying green energy contribute to the looming shortage?
I was recently asked to speak at a ‘Green and Tonic’ event and answer the following question:
Can businesses buying green energy contribute to the looming supply shortage?
Yes absolutely it can but most would agree there’s been relatively limited activity in this area to date. In my presentation I tried to answer the following questions
- Why would a business buy green?
- What’s getting in the way?
- What can be done to accelerate progress?
Why would a business buy green?
Most would believe that's going to be good for the brand, reputation, carbon reduction - particularly consumer focused business reckon it will probably help drive sales ultimately. The problem for businesses is that these benefits are typically ‘intangible’. A focus on the more tangible element – how will this influence my utility bills – is likely to uncover a perception that this will be more expensive. And in the short term that’s likely to be the case. But the gap is narrowing and if you take a longer term view that the alternative - standard 'grid based' power - is getting more expensive then renewables should be the cheaper option in the long run. The Government has adopted this view and is currently buying renewable power through the Energy for Growth programme, clearly stating that they are hoping to save money.
But there's another benefit that can easily be overlooked. Buying renewable energy also protects against energy cost volatility as renewables aren’t exposed to fossil fuel cost fluctuations. Although harder to quantify this benefit it certainly resonates with corporates looking to manage volatility in procurement budgets. Energy cost certainty can as important, if not more so, than getting the cheapest possible cost at any given point in time.
So I think the case is compelling and I'm not alone, EY asked just under 200 energy managers last year and just over 1/3 were actively considering buying more renewable energy. So why isn't more happening?
What’s getting in the way?
Firstly I don't think many large corporates are comfortable trailblazing in a non-core area of activity. Not many corporates have gone into renewables at any significant scale just yet. M&S, Sainsburys, BT have in the UK and internationally you have Ikea and Google and a few others, but this is still the exception rather than the rule. However this may not last.... And as much as trailblazing feels uncomfortable so does being left behind: Corporates wouldn’t want to miss out if they see a few of their competitors acting - so watch out for this effect reversing as activity increases and peer pressure encourages more action.
Secondly businesses typically treat energy as an operational expense and therefore it’s a short term operational issue to be managed rather than a longer term strategic issue to be proactively influenced. Our survey backs this up. The respondents thought that power prices would rise 50% (average of all responses) by 2020 in the UK. By definition you'd think that expectation would be a sufficient impetus to act but in the same survey we found out that very few businesses formally forecast utility costs more than 3 years into the future. It's hard to say you’re tackling a 2020 challenge if you’ve only got 3 years or less worth of numbers to feed into your business case analysis.
Lastly a generic but still pertinent point. Businesses are complex, hierarchical, rules driven organisations with this issue cutting across many different departments and geographies. Reaching common understanding, reconciling views and achieving consensus with a top down mandate to act can be a lengthy process and one that can easily be derailed.
What can be done to accelerate progress?
So time for some more positive news. There’s a range of implementation options here but one that's finding traction in the market at the moment is the direct power purchase agreement between a business and an off-site, independently developed renewable energy project. By my reckoning there’s 5 stakeholders in this arrangement: Project developers, banks, government, utilities and energy consumers. All 5 have the potential to benefit:
- Developers get to sell power direct to the customers - which at the moment is quite likely to be a better deal than the current route to market selling through the Licensed Suppliers. If developers get a better power purchase agreement their projects are more bankable and therefore the banks should be able to lend more money to projects to fund construction.
- .....More money from the private sector means that the Government experiences a boost to clean energy deployment without having to deploy extra subsidies - so George Osborne and HM Treasury should be delighted.
- Licensed suppliers (the ‘Big 6’ and others) can win new customers by offering supply services around this arrangement that are more competitive than the incumbent suppliers (that may not be able to offer a supply service with a direct PPA integrated); and
- The corporate benefits as I’ve set out at the top of this blog (reputational boost, potential cost reduction and cost volatility reduction).
So there’s an incentive for everyone to act and here’s what I think they need to do:
- The government needs to fix carbon accounting rules so that corporates that buy renewable energy direct from a project and help to bring new capacity online get to count that as zero carbon electricity. At the moment government guidance encourages them to use a ‘grid average’ emissions factor regardless of how power is purchased. No legislative change is required; simply amending the DEFRA guidance notes would suffice.
- Licensed suppliers need to refine and develop competitive propositions around the necessary supply arrangements and integrate these into their efforts to win new customers or retain existing ones.
- Developers, their banks to some extent and corporates need to understand each other’s needs, build trust and work out how to structure these arrangements for mutual benefit. Corporates if they don’t already have one should develop renewable energy targets and a strategy to support that so they have a clear internal framework for action. This should help overcome some of the behavioural barriers I’ve identified.
So if you sit in any one of those 5 camps I’d encourage you to act and act soon as the opportunity is likely to be strongest for the next couple of years. Let me know if you’d like to find out why.