UK business leaders are reaching a sticking point on investment in low-carbon measures and they need help to find the confidence and the funding to make significant investments in their companies’ energy efficiency. That is what the team at Ernst & Young found when they spoke to board directors at 250 of the country’s leading companies.
There was a striking level of hesitancy about making significant investments in energy-efficiency measures. What particularly concerned us was that this hesitancy came in the face of a consensus that energy prices are going to significantly increase in the next five to ten years. Ninety-five per cent of those polled believed a significant rise was coming, yet few were taking the required action to address it.
So why are companies reluctant to invest? Seventy-nine per cent expressed concern over the time it would take to get a return on investment and 77 per cent feared the scale of upfront investment required. With this in mind, it must fall upon the government to make industry feel secure about making significant upfront investments and give companies a clear vision for the future. Part of this must come from explaining how developments like the smart grid represent a huge opportunity for businesses to take advantage of the move towards a lower-carbon economy, but too few businesses understand what it will, or could, mean for them.
Our research showed that companies that were aware of the smart grid and the benefits it could bring were further down the line in terms of investing in higher cost low-carbon measures. Of those who understood smart grids, 45 per cent had already invested in micro-generation, while 33 per cent planned to invest soon. That contrasts with 76 per cent of those who had no or limited knowledge of the term smart grid having not considered investing in micro-generation.
It is clear, therefore, that knowledge is a key enabler to significant investment. Companies have already invested in low-cost measures, such as improving temperature controls (75 per cent) and lighting upgrades (71 per cent), and they know energy price rises are coming. They nevertheless need greater knowledge to make the further, more capitally demanding, investments required if they are to prepare themselves for the higher energy cost future that they themselves expect.
The government should look to address the real concerns of UK businesses as they extend the Green Deal to the commercial sector. Providing business with the reassurance that investment is a long-term, sustainably viable option and offering a financial model that alleviates the fear of upfront cost is a powerful combination. This could be just the catalyst needed to help British business confront the threat of rising energy costs with investment in significant low-carbon energy efficiency measures, while simultaneously delivering new green collar jobs.
Richard Postance is an advisory partner in Ernst & Young’s power and utilities team.
The business of energy: findings from the Npower Business Energy Index
The annual Npower Business Energy Index (NBEI) canvasses business opinion on energy-related issues such as energy management, energy risk and carbon emissions. It engages firms of all sizes, from major energy users (MEUs) to small and medium-sized enterprises (SMEs).
When asked to identify the number one risk to their business, the top choice from MEUs was “energy risk”, and in particular the risks associated with security of supply and supply costs. This outweighed all other areas, including legislation, security, and health and safety.
With energy management strongly linked to the overall concern about energy risk, the index casts an interesting light on how large and small-sized energy users are tackling the issue of energy consumption and overall management – set against the backdrop of current challenging economic conditions.
It showed that the importance attached by businesses to energy management and reducing consumption levels has increased since 2010. Now at its highest level since the index began in 2005, the importance rating has climbed to an average of 7.4 out of 10 this year, compared with a 6.9 rating in 2010.
While the overall trend is encouraging, the disparity between MEUs and SMEs is stark. Fifty-three per cent of SMEs questioned admitted to still not having any energy-efficiency measurement tools in place, a figure that drops to just 15 per cent for major energy users. Overall, 41 per cent of all businesses questioned had no measurement mechanisms in place. More needs to be done in this vital area.
For those businesses that have implemented energy-efficiency measures, the NBEI shows they are delivering results. Half of SMEs and 58 per cent of MEUs say they have achieved savings in energy consumption of up to 10 per cent. Progress is being made in comparison with 2010, with 8 per cent of MEUs saying they have managed to achieve a 20 per cent saving – none did 12 months ago.
In terms of the measures businesses are undertaking, SMEs favour quick wins. Low-cost examples such as turning lights and equipment off deliver, in their view, the biggest payback. There was a lack of awareness that monitoring and measurement is key to any sustainable energy management strategy. Seventy-nine per cent of SMEs, for example, were not using smart meter technology, stating they were unsure of the benefits.
For the MEU community, staff engagement was the most popular course of action to help reduce energy usage and costs. This achieved a 7.2 out of 10 rating, compared to 7.1 for investment in energy efficiency technologies and replacing old equipment.
In terms of energy management partners – for example, for advice on regulatory changes or on how to reduce emissions – SMEs prefer to consult their energy suppliers, while MEUs are more likely to turn to non-governmental organisations or external consultants.
Concluding with a look at the big picture, 71 per cent of MEUs do not view the 2050 80 per cent carbon emissions reduction target as achievable (compared with 78 per cent last year). The shorter 2020 timescale and the more modest 34 per cent carbon reduction is deemed more realistic. The majority of all businesses (64 per cent) did not think current coalition government policies would help businesses reduce carbon emissions overall – views that contribute to a fragmented picture about the current and future low-carbon economy.
Dave Lewis, head of business energy services for Npower.