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Energy Procurement
IMPACT OF COVID-19 ON THE ENERGY MARKET
The impact of COVID-19 has created unprecedented economic and social consequences globally. COVID-19 has significantly affected all aspects of life, including the energy sector. Though we are nearing the end of some economic and social restrictions, the consequences may have indelibly impacted the behaviour of the energy market. Fortunately, there are tentative signs of an economic revival as businesses begin to resume operations, which means many could now capitalise on the developments on the energy market.
Fig 1 Energy prices have plunged to record lows. [Source: Northern Gas and Power]
Commercial activity has through months of inaction. The Furlough been curtailed for many scheme, business grants, VAT deferrals businesses and firms since and interruption loans have gone some the UK’s lockdown, with the way to protect businesses, but a more Organisation for Economic obvious and straightforward solution
Cooperation and Development has been neglected: the cost of energy. forecasting an alarming 11.5% slump in Often overlooked, energy costs
UK GDP, greater than the falls in France, constitute the single most critical supply
Italy, Spain, Germany and the US, the element for the smooth output and Paris-based thinktank said. operation of any business, especially in
The new reality compels businesses services such as the industrial sector. to better manage costs and energy Energy costs for the manufacturing behaviour to secure their futures or risk industry often represent the second or financial damage as we begin the post third highest expenditure, after labour
COVID-19 recovery. The time afforded costs or materials. Manufacturers to businesses as a result of lockdown have saved money through the lower has been a great opportunity to regulate demand for materials, and governmentand scrutinise commercial operations sanctioned financial assistance has to identify and remedy inefficiencies. relieved some payrolls, but what is
This report looks at how the being done about energy costs? energy market has been affected, The global energy market is currently and what businesses are still able to sitting at a 70-year low. Some perceptive do to capitalise and manage energy energy managers have managed to and energy expenses efficiently. capitalise on this by locking in longIS IT APPROPRIATE TO term fixed energy contracts at a heavily reduced premium, allowing them to BUY ENERGY NOW? budget and forecast responsibly over the COVID-19 has caused companies in long-term with discounted energy rates. the UK to urgently review their operations Live data from wholesale energy in order to maintain financial stability markets indicate that the grid is
struggling to manage a massive oversupply of electricity and is also facing difficulties in depositing the excess supply, leading to UK electricity markets plunging into the negative 66 times. The data would indicate that securing a new, long-term energy deal in this market could give businesses a financial advantage over idle competitors as we begin an economic recovery.
WHY SHOULD I BUY ENERGY NOW? IS IT THE RIGHT TIME TO BUY ENERGY?
Global economic uncertainty has led to a collapse in the demand for energy. With the lower demand, energy prices have fallen considerably. Data from wholesale energy markets, trading in Megawatt Hours, indicate the true imprint of COVID-19 on energy markets. Energy markets peaked at £68.27 per MWh in 2019 but have now dropped to as little as £42.67 per MWh in April 2020 – a colossal decrease of 35.5% in price. The recent imprint COVID-19 has left on the UK energy markets can be seen in the radical decline in Fig. 1.
WHY IS THIS HAPPENING TO THE ENERGY MARKET?
As suppliers struggle to sell viable quantities of energy in the current climate, we can expect the low energy price trend to continue well into mid-to-late 2020.
As well as the lack of demand, the steep drop in prices in the energy forum is down to the immense inventories of gas supplied to the global market with larger UK businesses reaping the rewards. Record hauls of gas are flooding the UK market from Qatar, Russia and the US. Analysts predict gas contracts are expected to fall by up to 30% in 2020 as the UK expects to receive an energy surplus at record levels.
Russia, Europe’s largest gas supplier, sustains its colossal flow of gas to Europe in order to establish market dominance and obtain a stronger economic foothold in the gas extraction industry. In March 2020, Gazprom (Europe’s largest gas supplier) celebrated the higheston-record share of the gas market, at a commanding 36.7%. Gazprom is keen to maintain its control of the market and has pledged to fight off challenges from the US and Saudi Arabia by continuing its generous flow of energy into Europe.
WILL THE MARKET RECOVER? The market is beginning its recovery. Recent government easing of economic restrictions will see a demand for energy rise, leading to the inevitable increase of energy prices towards previous levels. Similar to the 2008 recession, greater economic activity and adaptations in financial policy will help to stabilise global markets. Some financial reports even indicate that UK GDP could return to positive growth of 4.5% by 2021.
SUMMARY: • Commercial activity declined sharply from COVID-19 onset, reducing demand for energy • Lack of energy demand and excess energy supply resulted in market crash; energy markets currently at 70-year low • Consequently, energy prices now heavily reduced; reviewing energy contracts now may lead to future savings • Economic recovery expected by 2021 – prices on wholesale markets may stabilise within 6 months • Energy consumption patterns must be analysed to eliminate inefficiencies I’VE READ THE DATA, NOW WHAT SHOULD I DO?
To capitalise on the condition of the energy market, businesses should review their energy management systems now. Reviewing energy behaviour and consumption patterns could lead to longterm savings on energy bills. Investments in energy software are becoming everuseful as a global drive towards clean, green energy emerges post COVID-19. ALPHA. Lite provides energy management software-as-a-service (SaaS), which is fully cloud-based and accessible remotely. Where energy management systems would previously take months of data collection, and cost tens of thousands in hardware and regular maintenance, ALPHA. Lite instantly provides 14 months’ worth of historic consumption data within two minutes of sign-up. The revolutionary software records consumption patterns and gives alerts when inefficiencies are highlighted, prompting businesses to quickly and easily implement preventative measures. ALPHA. Lite offers energy assessment remotely, without the need for intrusive site visits or expensive hardware. Currently, no other platform can do this. This technology is exclusive to ALPHA. Lite and unavailable elsewhere in the energy industry. ALPHA. Lite’s goal is to make businesses more efficient, to stop energy wastage and work towards net zero carbon. https:// clearvuesystems.com/alpha-lite/
ENERGY PROCUREMENT
Andrew Toher, Head of Customer Insights, Enel X UK, looks at the options available to energy managers as the country emerges from lockdown.
According to International Energy Agency data, COVID-19 has caused a “staggering” decline in overall energy demand. Many organisations have been left struggling to make sense of abnormal demand patterns throughout the crisis. Where facilities have been forced to stand idle, demand has plummeted. For some operations, such as distribution centres, demand has actually increased in line with activities.
With the uncertainties surrounding lockdown exit strategies, organisations have little idea when demand will return to normal, or for some, what normal looks like once lockdown is over. The transition back to work will be a gradual process for many, with social distancing continuing to impact operations for some time. Organisations will be under enormous pressure to control their costs, with energy spend in particular coming under the spotlight. Depressed energy prices present attractive opportunities to lock in energy savings. This has made committing to long-term renewable energy purchasing more difficult when viewed in the context of current conventional power market pricing.
THE NET-ZERO OPPORTUNITY
The UK government recently signalled that it would ‘probably’ not publish the Energy White Paper until the Autumn, and the delay in part was because ‘we need an institutional refresh’ to meet net zero goals. Alongside the growing evidence linking air pollution with the health impact of coronavirus, organisations may come under pressure to accelerate their decarbonisation initiatives. Some governments are already demanding steep emissions cuts from certain sectors in return for bailout packages. On top of this, many local authorities have declared climate emergencies and are looking to accelerate their regional net-zero initiatives. While the coronavirus continues to spread and challenge our way of life, a bright spot emerged recently when the International Energy Agency (IEA) published data for the first quarter of 2020. It showed a 5% decrease in global CO 2 emissions compared with the same quarter in 2019, a figure which could increase to 8% for the entire year. As a result of depressed electricity demand, renewables have claimed a greater share of electricity generation, increasing roughly 3% globally.
CUSTOMERS LOOK TO MANAGE RISK AND STAY ON TRACK TO MEET DECARBONISATION TARGETS Unfortunately, there is no one-sizefits-all strategy as major energy users look to navigate their way through the COVID-19 crisis. The best course of action depends on the sector and each customer’s specific situation. Many customers cannot easily delay short-term purchase decisions and while the best approach for each business will depend on their specific circumstances, there are some best practice recommendations that should apply to most organisations.
Buyers are often tasked with decarbonising their energy systems while looking to minimise costs. Attractive prices for short-term energy deals make long-term renewable power purchase agreement (PPA) commitments look relatively expensive today. However, there is nothing to suggest that today’s exceptional short-term price trends will change the long-term outlook for energy prices. A PPA that looked like a good deal a year ago may still be a good deal today. Buyers shouldn’t assume that procurement forecasting models using today’s energy prices will be valid over the medium to long term. When re-evaluating projected economic benefits of a long-term renewable energy contract, it is important to review those outcomes over different scenarios, which may range from 12-20 years.
Delays in the global supply chain may impact the timeline of renewable projects, which are often dependent on shipping schedules and manual labour. While delays are uncertain, companies may have to adjust to the possibility of new project timelines and plan to cover any gaps in supply contracts by extending or renewing existing contracts to avoid holdover rates. Companies that face project delays may need to find short-term solutions to meet sustainability goals in the interim by purchasing Energy Attribute Certificates such as Guarantees of Origin. Many large developers have robust procurement teams with access to a portfolio of assets and can help bridge the delay with Energy Attribute Certificates.
Demand for corporate renewable energy is driven by a variety of factors. Corporations are striving to be good corporate citizens and community partners through more sustainable business practices. As an increasing number of employees, investors and consumers are all asking organizations to engage in more sustainable activities, this is resulting in companies embracing climate action.
Because the process of renewable energy procurement can take years from commitment to commercial operation, it’s more important than ever to keep the momentum going – even if an organisation has put the pause on transacting.
Procurement is just one part of an increasingly holistic and complex energy strategy, which typically includes long-term sustainability goals, monetising flexibility and demand-side response, evolving efficiency measures and deploying EV infrastructure to enable e-mobility. With a raft of competing priorities, it is extremely challenging to achieve the right balance.
THE NEW ENERGY TRANSITION We should expect continued turbulence across the energy sector for some time. Combining a detailed understanding of the dynamics of today’s energy landscape with a vision for the long-term horizon will enable organisations to build agility and resilience into their procurement strategies while maintaining a commitment to decarbonisation. Having access to procurement professionals with extensive expertise in assessing energy contracts will help manage risk and enable some customers to take advantage of the attractive prices in retail markets to meet their energy needs. www.enelx.com
