There is much reporting, quite rightly, on the terrible impact increasing energy prices are having on domestic households. On 1 October the price cap is expected to rise to around £3,600 and further rises in January could see average annual energy bills hot £4,200 next year. This is an extraordinary increase on the £1,400 cap just a year ago (October 2021).
The energy price cap, however, does not apply to commercial users and businesses will also face huge price increases come October.
October is traditionally the month for businesses to renew fixed-term energy contracts. Business energy prices have shot up over the past year (proportionally more than domestic tariffs) and October’s rises are likely to be dramatic.
Industry forecasts suggest businesses renewing a 1-year contract can expect to double their energy costs for the coming year. Those renegotiating a two-year deal agreed in 2020 could face a 500% increase on their current bills.
How does that impact us?
Government statistics show that energy costs make up between 2-10% of UK manufacturing output value. Increasing energy costs therefore directly impact the cost of manufactured goods and hence drive inflation. In some industries, however, energy costs make up a larger percentage of final product prices and purchases of these goods can be hard to avoid.
In the food and drink industry, for example, energy accounts for an average 15% of product costs. Here, a doubling of energy costs would logically lead to a 15% increase in final product costs.
If the above example of manufacturers experiencing a 500% increase when renewing a two-year energy deal is correct, this would result in a 60% price increase of the final food or drink item.
When these products are staple food items, it’s easy to see how such increases would drive inflation, further impacting households.
What can be done?
Businesses will always negotiate the best supply deals they can. But so long as we (and they) are dependent upon imported oil and gas, they will never be in control. Geopolitical issues (e.g. the Russian invasion of Ukraine), speculators, market fluctuations and any number of supply issues can always raise prices.
Energy security should therefore be a goal at both national and organisational levels.
For organisations, this often means self-generation. Solar PV is an excellent route for many businesses to achieve this. This is a mature, well understood technology with very low maintenance overheads. Panels can be installed on suitable roofs or unused land – or even as solar carports.
Recently, low panel costs, together with rocketing energy prices, have transformed the economics of solar PV. In fact, a quick survey of last month’s solar PV proposals from our Locogen Energy Services team shows average payback periods of less than 3 years. These financial returns are matching the best days of the Feed-in Tariff and are allowing businesses who missed out then to secure their energy at a hugely competitive rate, for decades to come, while lowering CO2 emissions and boosting green credentials with customers.
Where land is available, wind turbines could be another option. For example, Locogen managed a project to install 2 x 500kW turbines at Princes Gate Springwater (now Nestle) at South Wales.
Another client, Arbikie Highland Estate Distillery are currently working with Locogen to install a wind turbine to produce green hydrogen to raise steam for the distillation process, not only reducing energy costs but also moving towards a net zero business.
Conal McElroy, Business Development Manager for Locogen consultancy, says: “We’re seeing a phenomenal rise in demand from industrial and commercial clients across all sectors. Food and Drink is particularly busy, possibly due to the higher use of energy but also because of pressure from customers looking for greener products.”
According to Cornwall Insight, energy prices will not return to 2020 levels until 2030. So, with payback periods of under 3 years, and the move towards net-zero business, onsite solar PV generation will continue to be an attractive investment for years to come.
Please Contact us if you’d like to discuss energy options for your business.