Every business uses energy. For many this is a very significant operational overhead. Yet there have historically been limited opportunities for businesses to manage and minimise their use of energy and its associated cost. The smart energy revolution offers businesses opportunities to reduce energy costs and exploit energy revenue generation.
What is “smart energy”?
There is no convenient universally accepted definition –
the concept has a variety of connotations in different contexts. It encompasses
smart gas and thermal grids, as well as electricity, and the exploitation of
synergies between them. In its simplest form, it is the generation,
distribution and consumption of energy in an intelligent, integrated way. The
increasing decentralisation of UK electricity generation and integration of low
carbon generation is a key smart energy challenge. That transition requires the
flexible and efficient matching of variable renewable generation with demand,
utilising sophisticated IT systems and support mechanisms to balance the grid.
The tools of this revolution include smart meters,
innovative renewable generation and energy storage technologies, demand
reduction mechanisms, “virtual” power stations and a range of associated
business models and instruments. Used effectively together, these tools help
enable generation and demand to be balanced efficiently and can provide
businesses with options to reduce energy usage and cost.
How can businesses outside the energy industry take commercial advantage of
this developing revolution?
Six key areas of opportunity are listed below. Which of
these may be suitable for a particular business will depend on many factors,
including the business’s appetite for risk and for working collaboratively with
third party energy services providers, the extent, location and tenure of its
real estate portfolio and the volume and profile of its energy demand.
1. Energy efficiency: insulating an office
or factory may make business common sense but might not, on its own, be seen as
a particularly smart energy measure. Energy efficiency however encompasses many
other measures and schemes, including: demand reduction, voltage optimisation,
lower energy use appliances and sophisticated control systems. Energy
performance contracts, under which energy services providers are remunerated or
incentivised according to energy savings achieved by the customer, can provide
suitable businesses with a managed system for reducing energy use and cost.
2. Own energy generation: generation from
renewable sources has grown exponentially in the UK since the introduction of
the Renewables Obligation in 2002. Originally largely the domain of energy
developers and utilities, the deployment of renewable generation has been
embraced by many businesses not associated with the energy industry. The
introduction of Feed-in Tariffs in 2010 stimulated widespread deployment of (in
particular) ground and roof mounted solar PV generation facilities at business
premises, as property owners sought to benefit from the combination of reduced
energy bills, a generation tariff for each unit of electricity generated and an
export tariff for any power exported to grid. Although there have been well
publicised reductions in renewables subsidies, as installation costs continue
to fall and the need for grid support services grows, there remain
opportunities for businesses to benefit from renewable generation at their
3. Private wire schemes: a private wire is
an electricity network which does not form part of a regulated distribution (or
transmission) grid. Where electricity is provided by a generator to a customer
via private wires (without that electricity being conveyed through the grid)
various grid use-of-system charges, lines losses and other electricity industry
charges are avoided. Where generation is located close to demand, this can
provide an attractive opportunity for the generator to sell power at a higher
price than available for sales to grid and the customer to buy that power at a
lower cost than generally available from the grid. An important additional
benefit is that the parties can enter into long-term fixed (or index linked)
power pricing arrangements which may not be available for power sales to and
from the grid.
4. Sleeving: this is an increasingly
popular business mechanism by which a generator and customer, which are not
physically connected by a private wire, buy and sell power to each other. As
the power generated is fed into the grid, the arrangement does not have several
of the private wire benefits outlined above and does require the involvement of
a licensed supplier to deal with grid requirements. However, it does enable the
parties to enter into long-term power arrangements which provide transparency
of pricing. Where the generator supplies renewable energy it further enables
the customer to demonstrate publicly a commitment to low carbon energy sourcing.
5. Grid support services: as energy
generation becomes more decentralised and complex, with a growing proportion of
generation from variable renewable sources, there is an increasing need to
balance the electricity grid to ensure there is enough (but not too much) power
of the right quality at each moment in time to meet fluctuating demand.
National Grid has a variety of contractual mechanisms available to help achieve
security and quality of electricity supply. These include
- Frequency response contracts: under which the service provider
reduces demand or increases generation when required by changing its power
output in response to electricity system frequency in return for availability
and utilisation fees.
- Short term operating reserve contracts: which allow National Grid to draw on
reserve electricity from a generator when demand spikes occur. The generator is
paid a regular amount for being on standby and a top up amount whenever reserve
electricity is needed.
- Capacity market contracts: which pay electricity capacity
providers for secure electricity supply. Capacity providers must deliver
against their capacity obligation at any time of system stress or face
Energy storage technologies (such as batteries, pumped
storage, compressed air, flywheel and hydrogen generation) are expected to play
an increasingly important role in the provision of grid support services and in
the exploitation, by high energy users and generators, of time-of-day energy
price and use of system charges differentials.
6. Energy purchase sophistication:
increasing sophistication of metering, IT and trading systems has given rise to
a variety of energy purchase products for business customers looking to obtain
greater advance visibility on, and reduce, energy costs. Options exist for the
customer to link the price of purchases to specified indices, to fix (and
unfix) prices for blocks of power for periods of time in advance and to set-off
own generation of power against consumption across a UK portfolio of demand
There are a variety of business models available and in
development to exploit opportunities such as those outlined above. These range
from businesses undertaking projects on balance sheet (taking all cost, risk
and reward), through to the offloading of all or most of a project’s risk and
cost to a third party in return for a more limited share in the project’s
Every business uses energy. Most will benefit from
reviewing the increasingly sophisticated options that exist to reduce energy
consumption and cost.