The energy crisis is a long-term problem, and the sooner businesses take action to beat high prices, the better.
Industry energy bills are set to rise dramatically, with electricity and gas prices hitting unprecedented highs, and a likelihood that price pressures will last much longer than this winter’s acute challenges.
The situation could worsen as the confrontation between Russia and Europe over Ukraine and gas imports into Europe from Russia deepens.
“The outlook facing energy users is awful,” Ai Group’s Tennant Reed, Director – Climate Change and Energy, said at last week’s webinar, Beating high energy prices.
“We have seen a tripling of the 2023 electricity wholesale futures prices over the past year.
“If we look over the next few years, those futures prices do come down but to levels that are still above those of the previous energy crisis.
“We are looking at several years of high electricity prices.”
Lisa Zembrodt, Director – Energy Markets, Schneider Electric, said the energy transition provided commercial incentives for users to be more dynamic in their power usage.
Decarbonisation commitments are being pushed into value chains; 90 per cent of companies with science-based targets have value-chain targets.
“Businesses used to be able to consume what they wanted, when they wanted and how they wanted, paying the retailer the same rate, regardless,” Ms Zembrodt said.
“The only complexity you had was the number of retail contracts you had in your portfolio. Fast-forward to where we are now, and you’ve got a range of tools in your energy portfolios: physical assets like onsite batteries, solar or demand response; and financial assets like Power Purchase Agreements (PPA).
“It’s important to remember that the way you can monetise these physical and financial assets remains limited by the retail supply contract.”
To help beat rising costs, businesses should:
“This is a massive due diligence step for future success,” Ms Zembrodt said.
“Determine how much risk the key stakeholders or decision-makers are willing to take and what the aims of the risk-management strategy are. People in different parts of the organisation will have different views on the company's risk tolerance. Getting everyone on the same page helps to set those guard rails and guides the strategy for the next several years.”
There are many ways to decarbonise and to monetise the assets you have now — and may have in the future. Use in-depth quantitative analysis to understand how different assets in a portfolio interact, quantify the risk of different approaches, inform the renewable energy procurement and retail contracting strategy, and optimise outcomes for the short and long term.
Start with the end in mind. Seek energy contracts that enable progress in your portfolio. Negotiate for flexibility, thinking ahead of the actions you will be taking taking as you implement your holistic strategy. If your retail contract isn’t set up for flexibility, you will miss out on commercial opportunities or advantages that changes in your portfolio might bring.
“It’s crucial that energy users come together to ensure there is a balanced voice when it comes to policy,” says Ms Zembrodt.
“We are setting the policy for the next ten years and beyond. We need to ensure it meets the national energy objective of working for the energy consumer because that’s who the system is supposed to benefit.”
Fellow panelist Chris Briggs, Technical Director, Business Renewable Centre – Australia, discussed the sustainability and financial advantages of wholesale PPAs.
An increasingly mainstream option, especially for larger buyers, PPAs are long-term, fixed-price deals directly between the company and the renewables project — separate from a retail contract.
“Anyone who has signed a PPA in past years is very happy,” Mr Briggs said.
“During the past couple of years, they were probably wondering if they made the right decision and there were certainly a few organisations holding off, thinking: ‘prices are low, maybe we’ll wait’.
“Those who took a longer-term perspective are probably strutting around their offices like peacocks right now because they have secured a fixed price that has saved their organisation a lot of heartache.”
Points to consider before entering into a PPA include:
They typically take at least 9-12 months to establish, given their complexity. Engage a consultant to navigate your options.
Be prepared for it to be an extensive stakeholder exercise as much as a technical or procurement exercise.
“Buyers often tell us the hardest part was building support across different teams in the organisation,” Mr Briggs said.
“You’re trying to get a lot of people who don’t know about energy to sign off on a long-term deal which sounds risky.”
PPA prices are higher than they were a year ago. New projects reflect supply chain pressures.
“If you can get a price that you can live with, what value is it for you to get some greater certainty to try to get yourself off the rollercoaster? There are risks on both sides.”
“Even though five energy retailers have fallen over, there is still a reasonable field of suppliers. However, the market has changed, and retailers are looking carefully at load shape and how it matches against the PPA and their portfolio because they can’t easily contract out the risk of your exposure anymore.”
The PPA needs to be part of a wider energy-matching strategy. It needs to sit alongside energy efficiency, demand management and onsite generation because these are the quickest and cheapest ways to reduce costs. They will also increase the value and the options you have when you come to contract your PPA.
Luke Menzel, CEO of the Energy Efficiency Council (EEC), said there was much help for businesses in managing energy better.
“There are a lot of existing resources, government programs, companies and individuals that stand ready to support businesses through challenging times today,” Mr Menzel said.
Key resources from the Council include its annual briefing, Navigating a Dynamic Energy Landscape, targeted at boards and executives who are not necessarily energy experts but are making decisions that impact a business’s energy strategy.
It provides Australian businesses with information on:
The EEC also provides industry-specific information within its Sector Spotlights.
“Now is a good time to implement a formal energy management system,” Mr Menzel said.
“Many businesses in Australia have gotten away without any formalised energy management, largely because energy was so cheap for so many decades. It wasn’t justified.”
To improve energy performance, businesses should:
The EEC’s Australian Manufacturing: Gas Efficiency Guide sets out practical and proven measures that deliver energy and cost savings in gas-intensive manufacturing operations.
“It might prompt some thinking around opportunities that you might not have thought about, such as fuel switching and the role of heat pumps,” Mr Menzel said.
Finally, the Council has a tax-incentive guide that provides information on temporary, full-expensing, instant asset write-off provisions available until next June.
“If you are thinking about building a business case for significant upgrades to processes or equipment, we are in a window here where your input costs are through the roof, but you’ve got these generous, instant asset write-offs that you can leverage to build a business case,” Mr Menzel said.
“This is a time-specific opportunity that could make a significant difference to your energy bill and do so quite quickly.”
The EEC has also addressed concerns for tenants who don’t own their own premises.
“While there are centralised or fixed assets that tenants don’t necessarily have control over, there is a surprising amount of plug load that businesses do have control over,” Mr Menzel said.
“Now is a good time to engage with your landlord.”
The panelists took part in a Q&A during the webinar.
Q: Are more energy retailers likely to go under and what are the implications for businesses who signed up with such retailers?
A: “Most that were going to collapse probably already have, but there is still room for more calamity,” Ms Zembrodt says.
“The market has a mechanism called the Retailer of Last Resort, so people are transferred from a collapsed retailer to a new one. The problem is that the fixed price contract negotiated with the collapsed retailer is not transferred. Supply is not affected, however."
Q: Is your PPA likely to be affected if your retailer goes under?
A: This depends on the specifics of the contract.
Q: Are heat pumps and hydrogen realistic options for business energy users over the next few years?
A: Heat pumps are something we need to invest in urgently, Ms Zembrodt says.
“Hydrogen is a coming technology, so companies shouldn’t be relying on a flip to hydrogen as part of their immediate strategy to decarbonise because it’s just not going to work. If we have any hope of meeting the aim to have 24-7 carbon-free energy, we need to be thinking of all the different solutions, but hydrogen is a little further out.”
Q: What are lead times for installing new equipment and upgrades?
A: Lead times are blowing out because of competition for equipment, especially since a lot of the technology comes from Europe.
“The best time to deal with this was four or five years ago,” Mr Menzel said.
“The second best time is now. This is not a short-term crisis. It’s something we are going to be working through over the next few years.
“Getting the ball rolling now will mean you are in a position to leverage those technologies ASAP, whatever that is in the context of your industry.”
Q: What can the Government do?
A: The most important thing the Government can do is to set a coordinated policy that enables the transition in a cost-effective way, Ms Zembrodt says.
Mr Menzel said ramping up investment and support for business to navigate the transition was crucial.
“We need to bring these solutions together in an integrated way to ensure businesses are in a good position to navigate the next few years which will put them in a great position to take that next step of decarbonising over the subsequent five or ten years,” he added.
“There is a double dividend here: it’s a no-brainer that governments invest in this space and we’re starting to see some appetite for that, so it will be a fascinating space to watch.”
Wendy Larter is Communications Manager at the Australian Industry Group. She has more than 20 years’ experience as a reporter, features writer, contributor and sub-editor for newspapers and magazines including The Courier-Mail in Brisbane and Metro, the News of the World, The Times and Elle in the UK.
