BRE IP2/15 PDF

Introduction

The importance of the business case

There are a number of key reasons to reduce energy use:

• to save costs
• to comply with legislation
• to manage risk.

The rising cost of energy in the UK since 2000 has highlighted the need for improved management of this resource. The Department of Energy and Climate Change (DECC) updates its predictions of fossil fuel prices annually^[1] and its modelling of gas prices, based on three scenarios^[2], is shown in Figure 2.

The three scenarios have been chosen by DECC to model the range of probable market conditions with a view to predicting price increases on an annual basis until 2030. The worst of these scenarios predicts a 17% increase in prices over the six years from 2013, ie about 3% per annum. However, prices actually rose by 16% from 2013 to 2014, which suggests that the model could be a conservative estimate. Several pundits are predicting an average 10% year-on-year increase.

As well as rising prices, security of energy supply has also become an issue, particularly since the UK changed from being a net exporter of gas to being a net importer in 2004. UK production is predicted to satisfy only about 40% of our demand in 2015^[3] (Figure 3).

This loss of capacity has led to increasing concern over energy security, as reported in an article in The Guardian in January 2010^[4]. This highlighted the risk of the National Grid cutting off gas supply to factories due to severe weather and an ageing power infrastructure.

When managing energy one has to overcome the false perception that it is a fixed cost to business and can be reduced only by tariff negotiation^[5]. Considering energy as a variable and controllable cost to a business^[6] provides the opportunity to discover the size of the potential savings. UK businesses spend £2.4 billion on energy annually, of which 21% is wasted^[7] (Figure 4).

As mentioned earlier, another major driver is legislation. This can be well established, as in the case of the Climate Change Levy (CCL), Climate Change Agreements (CCAs) with DECC, the Industrial Emissions Directive^[8] and The Environmental Permitting (England and Wales) Regulations 2010^[9], which mainly cover industrial and manufacturing organisations. The CCL is a tax on the use of energy in the industrial, commercial and public sectors. When it was introduced, the levy was designed to be revenue-neutral through a 0.3% cut in national insurance contributions and support for energy efficiency and low-carbon technologies. At the same time the UK government recognised the need to address the issue of energy-intensive industries. As a result these industries can obtain a 65% discount from the CCL by meeting targets for energy efficiency set out in their CCAs. These agreements are either between DECC and the sector (or trade) association, or between DECC and the facility operator.

These, and the more recent Carbon Reduction Commitment Energy Efficiency scheme (formerly known as the ‘Carbon Reduction Commitment'), are initiatives designed to help meet

the government's carbon reduction targets. Energy efficiency is a major contributor to achieving them. The Carbon Reduction Commitment Energy Efficiency scheme is a mandatory scheme run by DECC to improve energy efficiency and thereby cut CO₂ emissions in large public- and private-sector organisations. These organisations have to purchase allowances to cover their emissions each year and this gives them a strong incentive to reduce their energy usage.

From 1 October 2013 the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013^[10] required all UKquoted companies to report on their greenhouse gas emissions as part of their annual Directors' Report. That requirement affects all UK-incorporated companies listed on the main market of the London Stock Exchange, a European Economic Area market or whose shares are dealing on the New York Stock Exchange or NASDAQ. The UK government provides guidance to help businesses measure and report their environmental impacts, including greenhouse gas emissions^[11]. A guide specifically for small businesses on how to measure and report their greenhouse gas emissions is also available^[12].

The third major driver is risk. In addressing risk to the business, first consider the ‘do-nothing' scenario. Although this is not a realistic option when considering energy reduction globally in an organisation due to increasing energy prices and security of supply issues, it may be an option for individual projects. Increased prices can have a dramatic effect on the cost base of organisations, leading to reduced competitiveness and a need for a drive for greater efficiency. Security of supply issues require the protection of essential services, eg installing on-site generation for computer servers to prevent the potential loss of data. To mitigate these risks, organisations now need to understand how they use their energy, manage it and then invest in its reduction^[6].