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The transcript for ICAEW Insights podcast episode 38: 'The energy crisis – what can businesses do?'.

Philippa Lamb: Hello and welcome to the ICAEW Insights podcast with news and analysis from the world of accountancy, business and finance. I’m Philippa Lamb, and this time we’re looking at the energy crisis. Post-pandemic demand, storage issues, falling European production in recent years, exacerbated by the war in Ukraine – all these have contributed to a dramatic rise in energy prices globally. For business that’s meant a sudden and intense focus on the supply and security of their energy like never before. So how can businesses best navigate the immediate crisis and improve their longer-term energy security? And will net-zero commitments fall away as short-term disruption bleeds into medium-term corporate behaviour? To make sense of all that, we’re joined by Suresh Aggarwal, Director of serviced-office provider Airvivo, energy solutions expert Mark Kissack of Kissack Advisory and Matthew Clayton, Managing Director of Thrive Renewables, which builds and funds renewable-energy projects. Thanks, everyone, for being with us. Suresh, should we start by looking at how the energy situation is playing out right now on the ground? I know your business provides flexible offices and workspaces, I think it’s eight locations in London and Birmingham. You offer your tenants fixed outgoings, so you fix your energy contracts. But as I understand it, you’re only fixed till next year, is that right?

Suresh Aggarwal: That’s right, Philippa, the energy contracts start falling away from June next year.

PL: So, do you currently know what that’s going to mean for you?

SA: Yes, our utilities consultant has advised us that, based on current projections, our cost could increase by 200% when the contracts come up for renewal. So that’s a trebling of our energy expense.

PL: So, I know you’ve been looking into securing your own source of energy. What’s that process been like for you as an independent business? Presumably, this is new territory for you?

SA: We’d started looking at our own supply of energy three or four years ago, this was in the form of solar panels. And at that time, we found the payback period was eight to 10 years. And there was also quite a lot of debate on new technology coming out, which will reduce the payback period significantly. So, at that stage, we decided that we’d put this on the back burner. And now with the with energy prices being where they, are solar panels are back on the agenda for us. The other step we’re taking is trying to reduce consumption within our portfolio. Where we’ve acquired new sites, and they still have the old legacy lighting systems, the tube lights and other bulbs, we’re changing all that through LEDs solutions, which use much less energy, and the light is much better. And it reduces our maintenance costs, because the bulbs don’t need to be changed so frequently. And with the LED lighting, we’re also installing motion and light sensors, which mean the lights come on when they’re needed.

PL: Mark, you provide consultancy for businesses around energy solutions. I should say we’re recording this just about a week into Rishi Sunak’s next new government. What are the key challenges that businesses like Suresh’s are having to navigate?

Mark Kissack: Well, the situation today is the high fuel prices pushing everybody to go to renewables. And there is a shortage in the market, both from the producers – so heat pumps, there’s a waiting list in the UK – and also in the skills for installing renewable energies. So those are the two challenges we have right now, which is affecting the transition to renewable energies.

PL: As Suresh said, cutting usage has been his starting point. And I imagine the starting point for most businesses. Government certainly pointed that out right now. What are your clients doing in that area?

MK: In Switzerland, the government has really publicised the need to reduce energy consumption.

PL: And this is where you’re based, I should say, Switzerland.

MK: Yes, that’s where I’m based. So companies are following the advice from the from the government: switching their heating on later in the year, reducing the thermostat, keeping windows shut instead of airing the office and so on. So they are following government guidelines on this, and I know under Liz Truss there was a reluctance to talk about reduction in energy demand, which has to be part of the solution in the short term.

PL: Are many of your clients looking at securing their own energy sources like Suresh?

MK: Yes, they are. They’re working with the local electricity companies. In Switzerland, it’s less deregulated than it was in the UK. So, the solutions come across the local energy companies, but they’re getting advice and there are specialists in the field. But the problems of production not keeping up with demand and the shortage of installers is a real issue right now,

PL: In terms of businesses understanding the true cost of their usage, is internal carbon pricing mechanism that’s taken off with the companies that you do business with, or not yet?

MK: So what has happened is much of the larger companies, for instance, Swiss Re in in Switzerland. I know other companies in the UK have applied an internal carbon price, and that incentivizes them to do things like cut travel, reduce their energy usage, and encourages them to go for renewables as much as possible. Smaller companies, they don’t have the same management information systems as the larger companies, so they need to do that at a more general level, not at the cost centre level that these larger companies are doing. And they need to look at switching to renewables. In Switzerland, solar is the main renewable, there’s very little wind energy because of difficulty of getting approvals.

PL: Matthew, your business is all about providing renewable energy solutions, do you want to give us a quick overview of what Thrive does.

Matthew Clayton: So Thrive Renewables has been investing in building and funding new renewable energy products since 1998. We have a portfolio of wind, solar, hydro, battery, geothermal and heat projects within the portfolio. But I think what’s particularly pertinent to today’s conversation is that about a quarter of our portfolio we’ve built on a direct wire basis. So your typical renewable energy project would be grid connected, so would deliver onto the national grid or by the local distribution network and just feed power into the national system. But we’ve built a number of projects, which we refer to direct wire, where we work with an industrial or commercial host. And we’ll build a wind farm or a solar farm in their grounds on the roof, and then deliver power directly into their energy system. So therefore, they’re able to avoid the costs of the transmission distribution and the supply costs from the system in normal times – that’s the key benefit along with the net zero supply. But in current times, to the extent to which the renewables supply their power, they’re able to completely insulate themselves, effectively, from the volatility in the market. So that’s one of the models which we’ve developed over the last 12 years, and we’ve been delivering projects for hosts over that period.

PL: Okay, so the key goal there will be stability, both of supply and control over cost.

MC: Yeah, well, it’s interesting, actually, because, as I said, we’ve been delivering these products for 12 years now, and I think the early conversations we had with some of the first projects was principally around price stability. So FDs know that the cost of energy was going to be particularly relevant for some of the more energy-intensive industries. And then a little bit of environmental leadership crept into the conversation as well, which is great because we going to be looking at net-zero or zero-carbon power. And then what we’ve seen in further evolution has been that the value in supply chains, which are becoming increasingly net-zero conscious, the businesses we’re working with and others are working with, through this model can really demonstrate a lower carbon product than some of their competitors. And then particularly since the horrific events in Ukraine and the impact it’s had on the European energy prices, there’s a very, very definite cost management as well as carbon risk management conversation, which is happening now. 

PL: Presumably, the payback periods for renewables are shortening because of that?

MC: Well it’s interesting, it depends, how you look at it, because I guess as a business, as a generator of renewable electricity, then we don’t anticipate that the renewable sector or the generation space will be able to continue to effectively benefit from the higher prices. We don’t really want to because we want renewables to be able to demonstrate they can deliver power for less than the rest of the system. So we don’t really see that our grid-based projects’ paybacks will shorten and remarkably on that side. But certainly the value of the renewable supply at a fixed price, effectively, which already undercut energy prices as they were 12 months ago via renewable sources is great news for the hosts,

PL: Thinking about inflation, is that playing into higher prices for the equipment you presumably need to deliver these projects?

MC: Inflation’s hit in two main areas over the last 12 months. There’s the underlying cost of the equipment, the actual panels and wind turbines and all the infrastructure that goes with that. But also the cost, a lot of that material is being moved around the world. So the import costs have moved a lot. So what we’ve typically seen is between 25% and 35% increase in the capex on these projects over the last 12 months. But then in that same space of time, we’ve moved from a wholesale market where electricity has been traded at about £50 per megawatt hour for the last decade, to a sixfold increase for 2023 and a four-and-a-half-fold increase for 2024, in terms of that underlying wholesale power price. The cost of the equipment hasn’t moved anywhere near as much as the cost of the energy, so our ability to deliver competitively priced zero carbon energy is still very much in play.

PL: So Mark, does that chime with what you’re seeing in Switzerland?

MK: Yes, it’s exactly the same situation, energy prices are international. So we’ve had similar rises. And energy is a big input in manufacturing, especially metals, and the input inside into solar panels,

PL: Matthew, are you experiencing a spike in inquiries and interest.?

MC: As I said, that conversation has evolved with businesses around what their principal motivations are. But I think that anyone purchasing energy over the last decade has kind of been lulled into a false sense of security in a way, in that it has been relatively stable, remarkably stable for the last decade or so. But the spike in volatility we’ve seen more recently has definitely piqued interest from all manner of groups. Before it was just very high energy-intensive industries, which are interested in managing the energy cost because the risk register is right up there. But now anybody consuming energy is interested both from a price and stability perspective, but also, what I’m really encouraged by for the longer term picture is that zero-carbon picture as well, and in that move towards carbon neutrality and the value that the supply chains are seeing in that as well.

PL: So is the current situation playing into how easy it is for you to secure financing for these projects?

MC: Well, we tend to fund the projects ourselves, because that’s our core business. So we deliver solutions for businesses, which are effectively off their balance sheet so they can worry about what they do and we can worry about funding in the building, because that’s what we do. But certainly, globally, in a world where growth is slowing, renewables is certainly very much in growth mode still. And so for quality projects, there is capital and debt available. And obviously, the cost of debt’s moving around quite a lot at the moment with recent events, but there’s still quite an aggressive pool of capital and debt-chasing renewable energy projects. So I don’t think the funding so much of an issue in this space.

PL: Mark, the current crisis, it’s been a shock to business. It’s been a shock to governments. Is there a danger – Matthew alluded to this – that the scramble for energy security might create a flight away from renewables and back towards fossil fuels. We’ve heard from the new prime minister that there’s not going to be fracking in England. Presumably that’s welcome news for you. But as it stands this morning when we’re recording he’s currently not due to attend Cop27. Do you think we’re going to see less of a focus on green?

MK: I don’t think so. I think in the short term, we’re gonna have to go back to fossil fuels to get through the winter. So, in Switzerland, we are reliant on imports at certain periods of time, and we are assuming that those imports will not be possible because they’re from countries like Italy that are suffering a supply shock to the energy. So we have certain electricity generating plants using diesel. That’s a fossil fuel. But it’s a very short-term measure for this winter. It’s not a long-term movement. And in the UK, I would expect it already happened during COVID, that there will be some short-term use of coal for energy production. But this is not a long-term aspect in terms of the green agenda. In terms of climate change, we have seven years of current carbon emissions before we hit a 1.5 degrees warming target, which is a very short space of time. And I don’t see countries investing long term in new fossil fuel production because we need to reduce this significantly.

PL: Matthew, what are your thoughts on this potential renewed focus on fossil fuels? Do you think the focus on getting to net zero will suffer? Or are you as encouraged as markets?

MC: I think the immediate term is not clear which way will leap. You don’t have to step back very far to see that the issues we’ve got this winter that are biting us all, are related to fossil fuels. So, from a risk management perspective, the sooner we move further away from fossil fuels and become less dependent, the better. And renewables is obviously a big part of that. In the UK, 15 years ago, less than 2% of our power is coming from renewable sources. Now it’s over 40%. Coal is almost not being used and gas is reduced from 40% down to 20%. And just imagine what the situation would look like now if we were still generating 40% of electricity using gas. So I think there’s a dawning on people that actually locally sourced energy, which tends to be renewably sourced because it’s not part of an international market, is the way forward in terms of security of supply and price stability. So I think that gives me a lot of comfort that the net-zero agenda will keep moving. But I think the other thing, which has fundamentally changed over the last decade, but certainly over the last five years, is the cost of renewables. Bloomberg did some really interesting work back in February before the current price rally. And they suggest that for more than 50% of the world’s population, it’s now cheaper to deliver power from renewable energy, from a new renewable energy plant, than it is to operate the existing fossil fuel plant. So it’s cheaper to build new renewables than it is to run what’s on the system already. And I think that’s a real sign of where we’re headed and where the future is. Combined with that the number of economies which are beginning to feel the bite of the impact of climate change, those two things put together give me a lot of comfort that the net-zero agenda is very much here to stay.

PL: Suresh, as an end user, does that chime with your own strategy? Your focus regardless of what’s going on with pricing right now is long term on renewables?

SA: Yes, it does. And I think the increase in energy costs could actually work in the favour of everybody’s green agenda. Because if a small business like ours is thinking solar panels now, because of the energy costs, then there’ll be other businesses in the same space, who will invest earlier than they might otherwise have. Our strategy is for at least two of our sites to have solar panels installed by end of Q2 next year. And it was interesting that Matthew mentioned the pricing increases over the last 12 months, we found a 30% increase from last year. But because energy prices are so high the payback periods are more favourable. So that encourages us to go ahead with that.

PL: We hear a lot about heat pumps, is that something you’ve explored?

SA: Yes, we have looked at heat pumps. Many of our sites have the old traditional gas boilers to provide heating, and we looked at the air-source and ground-source heat pumps to replace the boilers. And what we found was that the new pumps are quite expensive. But coupled with that, we would need to change quite a lot of our existing infrastructure, especially the radiators, and one of the reasons for that is that the air-source and ground-source pumps work at much lower temperatures. So, to provide adequate heating, we’d need to replace our radiators for those with much larger surface areas. So, all in all, the investment would become quite large. And we decided not to go ahead with that, even though there were some grants available, but even that did not make it viable for us.

PL: Even with energy prices as high as you’re expecting next year?

SA: That’s right, because many of our buildings are quite old. So we’d have to spend a lot of money to change the infrastructure in totality.

PL: Mark, we’ve heard a lot about the shortage of storage in the UK playing a significant part in the energy crisis. Do you expect to see that addressed now?

MK: Yes, I do. The shortage we’ve had is storage of fossil fuels. Because the prices have been low for a long period of time, it was not worth people investing in additional storage for fossil fuels. So we’ve got a shortage for instance, of refineries in the UK, most of them date from a few decades. So that’s been the issue. With renewable energies storage becomes very important because they’re intermittent and seasonal. So typically, the solar power you get during daylight hours, you get less in winter. So that’s intermittent. And with wind power, it’s also intermittent. So, storage is a very important part of the future energy system that uses a lot of renewables.

PL: But your take is that the current pricing regime is going to make that much more viable now? We’ll see a lot more investment in that area?

MK: I think the investment needs to be in storage for renewable energy, electricity. So we’ve got situations today, like when the wind blows very strongly in Scotland, they have to actually disactivate the wind turbines because the grid can’t deal with it. In Denmark, for instance, they’re building an artificial island that’s going to act like a buffer between the wind power, which they heavily rely on, and the rest of the grid, that had storage on it. And we need to have similar sort of facilities in the UK, linked to the wind that we’re generating.

PL: Matthew, presumably that is less of an issue for you, if you’re doing dedicated supply to your clients?

MC: I think with that model, then we tend to size the project so that they will satisfy much of the demand on-site as possible using the space we have. So in that respect, being that almost off-grid element, it really works in that context. But we are here as a participant in the market, we are also investing in battery storage projects, because we can see that we need more battery storage, we need more flexibility in the system, to be able to push through from the 40% renewables run at the moment to the 80 to 90% that we need to get to for net zero. So we’re actually investing in both storage and renewable generation, because we think it’s important that those two things balance each other and move forward.

PL: Suresh, you’re looking at high energy costs next year, what is this actually going to mean for you as a business? Are you going to have to pass those on to your tenants?

SA: We hope that with the solar panels that have been installed in our sites, and the reduction in consumption across our portfolio, we will not see as large an increase in energy costs as is predicted. So we will try to keep the costs to our clients the same, but it’s a tough environment and we’ll have to see what we have to do.

PL: And what would you like to see from government to incentivize businesses to secure their own energy as you’re trying to do?

SA: In the interim, we would love to see support going longer than the six months that they have, because that will just give certainty. As a flex sector, we provide occupation for over 100,000 small businesses. And if we as a sector have to start passing cost increases to small businesses that’ll have a significant impact on them. In the longer term is the is the investment in renewable energy. As Matthew and Mark have mentioned, we’ve got to become more self-reliant.

PL: Having done much of the groundwork already, what would your best advice be to businesses, SMEs, like yourself looking to mitigate the effects of higher energy prices?

SA: Don’t procrastinate. The government’s energy cap runs out in March 23. And that will be very fast. So whatever steps people can take, energy reduction or improving technology, it’s important to do that now. All this is good for the bottom line, and also for the environment.

PL: Mark your advice to businesses looking to improve their position in the years ahead in terms of both demand and supply?

MK: They need to look more long term. And that means switching to renewables as much as possible. The solar power has gone down in price vary significantly over the years. And it’s a good opportunity to have control over the price, be self-sufficient, and to also be greener,

PL: Matthew?

MC: I concur with both the previous responses. And I guess the focus I would put on this is one around thinking about carbon dioxide reductions and net zero, both from a risk management perspective, from a price perspective, but also we’re seeing a lot of businesses are now winning and maintaining contracts on the back of the carbon content of their product or service being lower. And so I think the way that that long-term gain is if you’re managing your carbon responsibly, that will put you in a competitive position. But I think the other thing to say is that if you’re not lucky enough to be able to install renewables as part of your system, or as part of your site or estate, then the other thing to focus on really closely is when you use your power is almost as important as how much you consume. The reason that the UK and European energy system’s creaking is because it’s built threefold larger than the base case, built to deal with very high peaks and spikes in demand. So if you’re able to change your demand profile, or manipulate your demand profile, so you can help the system manage those peaks out, then you started to gain significantly over the next couple of decades because your business will help that management system. It will mean there’s less grid infrastructure needs to be built, there’s less generation needs to be built, if we can manage out some of these peaks. So if you can manipulate your systems and your consumption to manage when you’re using the power, then that’s the next tier of risk management.

PL: Suresh, Mark, Matthew, thanks very much, really interesting insights and excellent advice. If you’d like to dig deeper into energy solutions, the ICAEW energy crisis hub has more analysis and resources on navigating the current situation, and you’ll find a link to it in the show notes. That’s it for this episode. Thanks for listening. You can catch the next Insights podcast in early November, the next In Focus podcast about the current role of quantitative easing in the UK economy, that will air later this month. Join us for those two, and meantime, please do rate, review and share this episode, and subscribe to ICAEW Insights on your podcast app.