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Energy crisis: why businesses are going off grid

Author: ICAEW Insights

Published: 14 Apr 2023

As businesses eat the costs resulting from the turbulent and unpredictable energy markets, more are considering measures to take control of their own supplies.

Chris Maclean has seen a lot more CEOs and FDs engage with him over the subject of energy over the past few months. “We used to talk to facilities or junior procurement, but it’s now being taken a lot more seriously,” says Maclean, CEO of procurement firm Open Energy Market. “It’s defining sector competitiveness, business survival etc, so it’s at the top table.”

Given the volatility of energy markets over the past year, it’s not surprising. Household gas and electricity prices have increased by 214% and 114% respectively. Estonia, Netherlands, Italy, Austria and Denmark have seen the largest increases in energy costs. 

In the UK, the increase in the cost of living, to which energy prices have contributed, is 62% higher than the European average. In that environment, it makes sense that businesses might want to take more control of their energy costs. 

“The energy crisis hit its peak in August to September last year, and had an immediate impact on the businesses that had to absorb that cost – profit margins disappeared,” says Maclean. “We saw businesses go out of business, we saw extended shutdown periods. In the manufacturing sector, businesses were rushing to try to do something, but ultimately it was too late.” 

Businesses that could pass on energy costs were not without risk, it was just longer term; there were issues of competitiveness as prices increased. Those that acted early, or had already started securing their own energy supplies, however, were seeing little to no impact on their bottom line. 

“We’ve got a lot of our businesses well below the government cap,” says Maclean. “They were on rates that were, say, 15p, whereas other businesses in their same sector were on rates of 70p. That creates a massive competitive advantage within various sectors.”

This huge gulf between those with more secure supplies and those at the mercy of the markets is opening up businesses to the financial benefits of securing energy through renewables. This reflects global trends: according to the International Energy Agency, worldwide policy changes in response to the energy crisis would see global energy investment increase by $2trn a year by 2030.

The conversation for businesses revolves around how to remove their reliance on the grid, Maclean explains. The organisations he is speaking to do not feel that they can rely on government action to resolve the issue; things move too slowly at a national level. Increasing security of energy supplies is on many medium- to long-term plans – not just to stabilise prices, but also to minimise the potential impacts of blackouts. 

Maclean says that more businesses are moving to more flexibly traded energy contracts and diversifying the source of their supply. Power purchase agreements, in which a third party installs, owns and operates an energy system – usually renewable – are becoming particularly popular.

“It’s popular because you can convert the CapEx to OpEx,” says Maclean. “It’s off the balance sheet. It's effectively a supply contract; it's not a loan or a lease, there’s no exposure to interest rates. You can reduce risk on the energy markets and build your own solar panels. They are managed and installed by a developer, you're not paying an upfront cost. It's an energy contract, albeit an energy contract for 10 years, which has its own risks.”

In manufacturing, where energy costs could comprise around 10% to 12% of a business’s cost basis, more companies have made progress in securing energy supplies, largely through renewables. The ROI is also quicker, says Maclean, making it a more appealing option. 

He advises that businesses need to be proactive and take energy security seriously. Not enough businesses are joined up in their approach to energy procurement, he argues. Open Energy Market is developing a product to try to encourage businesses to join up their thinking.

“So many businesses have a disconnect between sustainability, finance and procurement. So in some cases, you have various departments operating against each other. We’re trying to bring every department together. It helps massively from a strategic point of view.”

That disconnect is holding back CEOs and CFOs from acting on net zero plans as it’s seen as only a cost rather than an investment with genuine returns. While the energy crisis is helping to change people’s mindset about using renewables to get off the grid, there is still a hesitance to get projects off the ground because of the perceived cost to the business. 

“As a CEO, you’re under shareholder pressure, you need to look at this from a financial perspective. And they haven’t seen that financial connection when their sustainability champion brings a solar project, as an example, to the table. True procurement data is a demonstration of the financial gains that you can make very, very quickly through a sustainability strategy. It's all financially driven. It opens up people's eyes to that and hopefully will mean that more business cases are taken through to execution.”

Everyone is looking for a silver bullet of some description to help them with the energy crisis, Maclean explains. There is a willingness to be open to ideas around renewables investment and analysing its strategic benefits. “Having an understanding of net zero from a financial perspective is music to the CFO’s ears.”

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