Energy Act 2011 – Will the Green Deal add more green to your profit & loss?

The British government is constantly striving to improve our outlook on the environment and is looking for different ways to achieve business and domestic buy in. The policies around the protection of energy has developed quite considerably over the years. In 1962 they implemented the Pipes Act, 1986 saw the Gas Act, 1998 was the Petroleum Act and ever since 2004 the Energy Act has been amended 3 times. Energy has been, and always will be a key commodity to any developed, or developing nation.

The reduction of carbon emissions is not only one of the key protocols of the Kyoto agreement, but is also steadily becoming a big area of trading for many countries and organisations. In June 2010, Barclays Capital bought Swedish carbon emissions trading firm, Tricorona, for £98 million pounds, signaling the growth of the emissions trading sector. Carbon reductions are good not only for the environment, but are also a huge area of income if there is excess to be traded.

The most recent Energy Act to be implemented, the Energy Act 2011, focuses on one key area, The Green deal. The main crux of the Green deal is to create a new funding mechanism to help organisations implement energy efficient measures without having to pay the upfront costs. The government has set a ‘Golden Rule’ to the Green Deal and that is – The charge attached to the bill should not exceed the expected savings.

Essentially the way it works is that the company that installs or recommends the energy measures will not receive any money upfront from the client. They will instead be paid from the savings on the client’s bill, and this will be paid directly from the supplier. It is an interesting funding mechanism, but no doubt the government will have to have grants in place as it will be difficult to get buy in from the suppliers.

To achieve the 34% carbon reductions by 2020 that were agreed in the Climate Change Act 2008, it will require the UK to reduce carbon emissions in our homes/communities and workplaces by 29% and 13% respectively. The Green Deal has been put in place to help us achieve these targets. The UK has one of the oldest developed building networks and whilst this is a great feat, it also means that many of our buildings are highly inefficient when it comes to energy. The way the government is touting the new initiative is that it is bringing our buildings up to date.

A further key area to the Energy Act 2011 is that as of April 2018 it will be unlawful to rent out a private, or business premises that does not to reach a minimum energy efficiency standard. There is a huge drive to ensure businesses buy in to the initiative, but the focus will have to be on the landlords even more so than the actual business owners. Some of the processes that are involved with the development and installations of energy efficient measures can be quit taxing and sometimes can deter companies from taking them on board. If companies do not see any immediate savings and do not buy into it, the dependence will then fall on to the landlords and also people looking to be ‘greener’.

There is also huge resistance from the energy suppliers. Currently the government’s proposal is expecting the energy companies to overhaul their payment systems to accommodate the payments to the energy efficient suppliers. Many energy companies have claimed that it is not feasible for their payment systems to be developed by October 2012, as was originally stated.

It would seem that the government needs to amend the Act and make it mutually beneficial for the environment as well as the key stakeholders in the agreement for it to really blossom.

Iran’s Oil Embargo – A Cause for Concern?

The threat of Iran developing a nuclear weapon is becoming an ever more realistic possibility. Although Iran categorically deny that they are enriching uranium for anything more than commercial energy development, the recent trip by U.N delegates indicates other wise.

The European Union and America have placed a trade embargo on any imports of Iranian oil as well as prohibiting any organisations dealing with Iranian banks. It is worth noting that Iran is the third largest oil producing economy on the planet and is the second biggest member of the Organisation of the Petroleum Exporting Countries, formally known as the OPECs. The OPECs was setup in 1960 by 5 original member states; it now consists of 12 members mainly from Africa and the Middle East. The OPECs generally hold 2 meetings a year, one in March and one in September, and the main topic of conversation is deciding what their output should be for the forthcoming 6 months. The decision on output is predominantly to control the price of oil to protect their long-term interests. They hold 79% of the world’s crude oil reserves and 49% of the world’s crude oil production.

With Iran being the current leading state of the OPECs, there is cause for concern that the embargo instated by the EU and America will have a long lasting effect on energy prices. It is also worth noting that Iran controls one of the world’s most strategically important straits, a strait that 20% of the world’s oil runs through, this is the Strait of Hormuz. The bigger picture needs to be understood. Iran is head of the OPECs; the OPECs controls 49% of the world’s oil production and the embargo could affect the world’s largest producing conglomerate to alter their production and this will subsequently increase the price of oil. There is evidence that this is already happening. For the first time since July 2008 the price of Brent Crude oil surpassed $128 per barrel and there are predictions that it will surpass $150 per barrel this year. The price of crude oil is always a good measuring stick for energy prices across the board.

The basic price of anything is determined by simple economics. Supply and demand. As soon as demand out weighs supply, there will always be a surge in price. When a singular country has the power of being the world’s third largest oil producer, controlling an oil passage that 20% of the world’s oil runs through and is also head of a conglomerate that controls 49% of the world’s oil production there is a worry that it will be able to control basic economics when it comes to oil prices.

With the wheels in motion and the price of oil surging, can this be controlled? This week there have been reports that Singapore and India have started to re-enter into contracts with Iran to purchase their oil. On one hand there is a moralistic objection to this, equally there is a need to relieve the rest of the world’s oil producing countries to ensure the price of energy is maintained at a feasible level.

In a day and age where we scrutinise over a few pennies here and there on our balance sheet, it’s important to remember that the cost of energy affects our profit margins by thousands of pounds. It is therefore hard to criticise India and Singapore for buying Iranian oil when it inevitably will help reduce the average companies energy costs. On one hand you have Iran controlling the supply, but for there to be equilibrium in economics you need to have someone controlling the demand; that is where we can give thanks to India and Singapore.

Volatile energy prices, 2012 and beyond.

With gas and electricity commonly being the second highest out-going cost for many organisations across the UK, it is important to understand what direction energy costs are going in the foreseeable future. The heavy fluctuations on the wholesale market are mirrored in the final costs to customers. It is important to understand what you can do to ensure your organisations expenditure is minimised.

It is expected that the world’s population will increase a further 1.4 billion over the next 20 years. This mixed with the current economic development of many emerging markets means that the demand for the world’s resources are being stretched to levels never seen before. Much of the world’s easily accessible oil is now depleted, and despite not yet running out, the costs of exploration and harvesting has dramatically increased. This has resulted in the costs being passed on to the bill payer. A simple question of supply and demand some might say… if only it were that simple.

Last year was considered to be one of the best performing years for commodities on the open market; this year prices have continued to follow that trend. For the first time since 2008 the price of a barrel of oil has surpassed $128 . There is also a fear of a potential shortfall in nuclear power whilst the transition from the decommission of our current nuclear power plants to the new plants being developed with the French government. This inevitably all adds to the increasing volatility of energy prices.

The diversification of our energy resources has helped to reduce our dependency on fossil fuels and this will aid the long term sustainability of our energy supplies. Renewable investment continues to grow with other slightly more controversial methods including nuclear power and fracking providing much heated debate.

In the UK, Ofgem has recently committed to reducing confusion and mis-selling within the marketplace. Historically Ofgem’s focus has been protecting domestic consumers, but they are now taking a positive interest in both supplier and third part intermediary (TPI) practices. Whilst it is still the view that business are big and ugly enough to deal with matters themselves, it is Ofgem’s belief that the market place should adhere to tighter regulations. Please click here to find out more (Link to TPI news article).

So what does this mean for your company’s energy bills? In essence, prices are predicted to continue too steeply rise. However, in the short term, high levels of unpredictable fluctuations will continue to dominate the market. It is therefore vitally important that you ensure your organisation procures the right energy contract, at the right time, with the right supplier.