Ørsted’s Ashley Phillips explains how strategies around on-site generation, demand-side response and energy as a service can help mitigate the impact of rising energy costs
As the colder weather sets in and energy needs are at their highest, energy has a significant impact on cost base for mission critical sites. Organisations are particularly feeling the pinch, as the current bullish market conditions persist. Wholesale gas and electricity prices are at the highest they have been since before the oil collapse 10 years ago and show no signs of abating any time soon. Several fundamental drivers have contributed to this price position, from heightened demand in emerging markets to low gas storage levels, among others.
Wholesale costs are, of course, only part of the picture. Changes to network and regulatory charges – which typically represent at least 50% of the bill – are also having a significant impact on costs, with electricity charges forecast to increase by 9%. April 2019 will see the Climate Change Levy (CCL) rise 41%, as charges associated with the CRC Energy Efficiency scheme are absorbed into CCL instead.
Even the most resilient sites could feel the chill of these cost factors. Organisations must therefore use all the weapons in their arsenal to develop strategies that cushion the impact; addressing those costs that they can control, as well as those that they can’t.
Flexibility means strength
For mission critical sites, core business is the absolute priority. Understandably, businesses are therefore cautious about participating in demand-side response (DSR) schemes, and the commitment to delivering capacity that comes with DSR. However, the very nature of a critical site means that they often have at least one form of back-up generation on site, making them perfect candidates to supply flexibility in some shape or form.
Adopting flexible arrangements has increased across multiple industries in recent years. As opportunity is weighed up and learnings become more widely available, there is greater comfort for those entering the field of flexibility for the first time. Data centres are a great example of a sector that has invested in additional generation to optimise returns and take advantage of headroom with their Distribution Network Operator (DNO) connection.
Identifying the schemes and products that work best for your organisation is, of course, vital. It is worth looking beyond the more established National Grid-run schemes such as Short-Term Operating Reserve (STOR) and Fast Frequency Response (FFR). National Grid recently announced its intention to trial a new, short-term frequency response auction from next year, enabling a greater number of technologies and organisations to get involved in demand side response.
The week-ahead service allows provision to start on the day of auction, enabling a far more ‘fleet of foot’ approach. DNO schemes can also provide an attractive alternative for businesses, supporting the balancing of localised distribution networks, as opposed to the electricity transmission network.
Because so many schemes contain strict obligations on delivery, which can be off-putting for companies that feel unable to make a firm commitment, at Ørsted we developed our Renewable Balancing Reserve (RBR) scheme, launched in 2016. RBR helps businesses to access value from the imbalance market; it works by reducing imbalance costs for Ørsted, as well as providing a revenue from the System Imbalance Price.
The resulting savings are then shared with participating customers. One of the major benefits for critical sites is the flexible nature of participation. There are no penalties or revenue claw back for non-delivery, no contractually committed response times or lengthy call durations.
Businesses can opt in or out on a case-by-case basis, depending on whether or not it suits their operations at a given time. Strike prices per MWh delivered are guaranteed, providing revenue assurance for any activation. Because it is associated with the imbalance market, it can nicely complement other DSR activity, rather than replacing it. In fact, customer P3P used excess energy from its CHP plant to earn an additional £273 per hour from RBR, with its energy manager describing the product as “simple, risk-free and profitable”.
Timing is everything
Network charges vary depending upon the time of consumption, with peak periods attracting a higher premium than those periods when demand is lower. Not only does this affect distribution network costs, it has a significant impact on transmission and capacity market costs; these are charged based on an organisation’s level of consumption during the three half-hour periods that showed highest overall network demand during the winter period. Where organisations are able to reduce consumption during anticipated peak periods, they stand to lower electricity bills. Turning electricity-hungry assets down, or switching to on-site generation, is frequently a more commercially viable option than keeping operations running at full capacity during expensive peak periods.
It is also worthwhile reviewing the timing of maintenance schedules and outages. Higher winter wholesale prices, coupled with increased network costs, make winter consumption a far more expensive business than running during the cheaper summer period. With that in mind, it might be worth reconsidering planned maintenance, assessing the opportunity to shift it to the more expensive winter months.
Generating your own energy – and revenue
All critical sites will have some kind of backup generation installed, providing contingency for any outages. On-site generation can make a big difference in mitigating high market costs, providing both the facility to switch to self-generation when the wholesale market is especially expensive, as well as a revenue-generating opportunity via DSR or electricity export.
If your on-site generation is becoming expensive and outdated, it is worth reviewing your options to find a solution that better meets your organisational needs; the right option can make a big difference to running costs and carbon emissions. Some of the obstacles to investing in new technology are resource or expertise in identifying appropriate options and access to capex.
To help alleviate these obstacles, we created Energy as a Service (EaaS) – which is a bespoke solution designed to take account of individual business needs, ambitions and assets. Our experts project manage the sourcing, installation and optimisation of generation assets, going on to help optimise the value through operational scheduling and demand side flexibility. We will even provide upfront funding so that payments can come out of opex spend for periods of up to 20 years.
Transitioning the UK’s energy system to one that is greener and more decentralised is a long and complex task. As such, the cost elements that make up the energy bill change regularly. Energy policy and regulations are also evolving. Keeping abreast of all of these market changes is crucial to keep tight control of energy costs but it can be time consuming. The role of energy suppliers is also evolving to better support businesses during these times of heightened complexity. Their specialist experts are able to interpret market changes for business customers, collaborating to manage costs effectively and spot suitable commercial opportunities for their customers.
With high wholesale costs having such an impact at the moment, that injection of specialist trading expertise is a must. Right now, the focus must be on stabilising costs over the longer term and your trading team will be your ally in helping you to make the right trading decisions for your business to protect your operations and your bottom line.
Ultimately, the right energy strategy is likely to contain a blend of activities. Resilience will always be of utmost importance, but businesses must not overlook opportunities to manage energy in a smarter way. The market is continuing to evolve, supported by technological and engineering advancements. Embracing the changes and taking a fresh approach will enable businesses to take greater control, meeting the energy-cost challenge head on.