Post - Blog
With the ongoing dip in crude oil prices, it is natural to assume that utility prices would follow a similar, downward trajectory. Yet electricity prices remain stagnant.
EP Shanghai 2024
Plus, the charges for the amount of electrons a homeowner or company consumes, also known as commodity costs, now typically represent less than half of an energy bill. On the other side of the ledger are a variety of non-commodity costs, from taxes to fees for grid technology. These expenses — and bills, as a whole — continue to grow.
So the common perception that inexpensive fuel sources such as oil and natural gas inevitably mean inexpensive electricity is a misperception. The era of energy volatility isn’t on the horizon, it’s now. And it’s only going to get more turbulent as the cost of oil, gas and other commodities start to rise.
Breaking down energy invoices for commercial and industrial companies highlights the real price of electricity — and opportunities to trim the ‘amount due’. Though somewhat hidden, substantial savings exist, as does a more strategic approach to energy purchasing and management.
What follows is an outline of the four utility costs to watch, along with how energy managers can reduce them to achieve substantial savings.
Environmental and renewable costs
Often unseen and the first utility cost to manage is environmental and renewable charges. These are often tucked away as they are directly related to climate action-focused programmes that encourage the need for renewable energy.
It is important for energy managers to keep close tabs on these costs as they are only set to rise. Utility companies have committed to investing more in renewable energy, especially in height of the climate change debate. An estimate of $250 billion is set to be invested by 2030, according to the International Energy Agency — almost double the amount from 2014.
Energy managers must seek ways to make these renewable investments work for their organisations. First, it’s important to evaluate renewable energy options carefully. While many assume they’re more expensive, the truth is that solar and wind power, for example, are cost competitive now and can lead to higher returns in the long term.
Incorporating green energy into the mix trims the amount of electricity purchased from a utility, as well as the fees for environmental programmes by extension.
An alternative way to reduce environmental and renewable costs is through gaining a better understanding of the tax exemptions available. As governments and environmental bodies continue to push hard for renewable energy, the number of incentives out there for businesses increases.
If organisations know where to look they can often enrol into subsidy schemes that can significantly lower costs. For some companies, these subsidies can equal upwards of seven per cent of bills — massive savings when it comes to an energy spend that’s six, seven digits or above.
As well as subsidies, companies can also earn tax-exempt status by making physical changes to their site and business. Implementing co-generation (generating electricity and heat simultaneously), or changing manufacturing and heating processes can go a long way towards saving companies money on utility bills.
Distribution costs
Another cost that continues to soar is distribution. Over the last five years, these prices, which essentially cover the transportation of energy from generator to user, have jumped over six per cent.
Just as the increase of renewables has affected energy bills, the move to smart grids has also impacted prices. The government and utility companies long for a smarter and more agile grid. However, businesses are left to pick up a majority of the financial burden. These costs are only going to climb as companies in the developing world continue to connect to the grid.
There is no silver bullet to avoid distribution costs. However, utilities often incentivise energy use at ‘low peak’ periods. Being able to shift consumption away from times when the overall call for electricity spikes offers organisations a fantastic opportunity to lower electricity prices, especially as distribution costs can often cover up to 20 per cent of overall energy bills.
Capacity and transmission costs
Capacity and transmission costs are charges that are also camouflaged. They represent the sum of all the poles, wires and other grid technology that connect the country. Having risen 91 per cent on average since 2011, these costs, much like the previously discussed distribution prices, are essentially infrastructure driven — meaning they are not expected to go down.
For reliability and environmental purposes, these costs have to increase and have become a larger portion of the average company’s energy bill, 15 per cent or more.
It’s clear from the issues raised above that fundamental changes in the energy mix are effecting price signals. As the industry becomes quick and more connected, it is only those who become proactive rather than reactive that will reap the highest benefits and in this case the highest energy savings. Understanding a company’s ability to manipulate and manage consumption is imperative especially as emerging legislation like the carbon-reduction policy comes into play.
Anticipation is one of the best skills to have in the energy market. Having the ability to predict and plan ahead means your company reduces its risk of price fluctuations, which in turn creates financial savings.
Energy commodity costs
After digesting all the costs that have little to do with actual energy consumption (non-commodity fees), energy managers will be glad to hear that energy commodity costs can also be cut.
Despite historically low rates, companies can still trim these fees by up to six per cent through a strategic energy sourcing and procurement programme.
Energy commodity costs account for around 45 per cent of an organisation’s utility bill and are prone to vary, often depending on the supply and demand balance, economic data, and underlying fuel markets and weather.
As these costs are frequently changing, understanding exposure in this market is key. Surprisingly, many companies have only a limited understanding of their energy risk. This is usually due to the mind-set that commodities such as electricity are like any other category of purchasing — something that’s procured once a year or quarter. A more holistic and flexible adaptation of buying is needed if utility costs are to be cut.
By breaking down a utility bill, the opportunites for savings are clear. As the sector becomes increasingly volatile, energy managers have no option but to adopt a more proactive and strategic management approach. Understanding the true nature of energy will provide organisations with the knowledge to balance security, affordability and sustainability both in the short and long terms.
Managing all the market variables can often be overwhelming. But if businesses truly want to save on energy, they have no other choice.