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Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 1

White Paper independently published by Edge Business Media – Spring / Summer 2011

Energy Exposure Powering decisions in your business

Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 2

the energy lectures. Day 1: Wednesday 4th May 2011

Day 2: Thursday 5th May 2011

National Motorcycle Museum, Birmingham

National Motorcycle Museum, Birmingham

‘Purchasing energy in today’s climate’

‘Business solutions today for tomorrow’s agenda’ Metering & Onsite Generation

the lectures.

the lectures.

Owen Thomas – International News and Business Anchor CNN

Owen Thomas – International News and Business Anchor CNN

Opening remarks from the Chairman

Opening remarks from the Chairman

Angus Berry - Energy Buyer, Thames Water*

Bruce Balmer, Business Development Director, ULTRaMo Engines

One of the UK’s most experienced energy buyers gives his take on the best buying practices for larger businesses.

On-site generation technologies vary in cost and efficiency. Can any deliver grid parity? This presentation compares them, and presents a highly efficient ‘viable green’ alternative to current micro-generation products.

Robert Buckley - Principal Consultant, Cornwall Energy European energy markets and legislation – major change is coming and it will affect us all.

Alicia Carasco, European Policy Director, eMeter

Mike Coulten - Managing Director, Energy Alert

The win AND win case of Demand Response: It is not only about reducing consumptions but providing flexibility to the system.

How to evolve risk management and purchasing strategies that are truly efficient and sustainable.

Nick Grealy - former senior energy buyer for the NHS Part 1: Flexible contracts – why bother? Fixing is best. Part 2: The shale gas revolution – is Europe heading for a gas flood?

Dr John Constable, Director of Policy, Renewable Energy Foundation Renewable Onsite Generation as a Buffer Against Policy Induced Energy Price Rises

Paul Farrell, National Sales Manager, IMServ Effective solutions to making the most out of your Carbon & Energy data

Suzanne Hitchin - Department of Energy and Climate Change* UK Climate Change Agreements and CRC – what will the final regime look like and what will it mean for end-users?

Chris Laughton, Managing Director, The Solar Design Company With solar energy moving from keen greens to financiers, energy generation has never seemed so sexy or lucrative. But do the figures stack up?

Kirstie Johnson - Energy Buyer, The Anchor Trust Kirstie won the title of Energy Buyer of the Year 2010. Hear her views on how businesses can benefit from active energy procurement.

Dr Tim Rotheray, Policy Manager, Combined Heat and Power Association Decentralised energy, demand response and energy markets – What could the EMR deliver for onsite generation?

Dr Craig Lowrey - Consultant, The Utilities Exchange Retrospective and prospective market analysis – It’s not better to be lucky than good!

Ian Marlee - Director of Trading Arrangements, Ofgem* UK power market reform – what will it mean for you and will it affect prices?

Wayne Mitchell – Head of Corporate Sales, npower The UK energy revolution – advice on how to maintain a secure, sustainable and affordable energy supply.

Ariel Perez - Global Head of Environmental Markets, Citigroup Emissions trading for end-users – a view from a top trader.


Space is limited – register today!

The Energy Lectures is a two-day programme, however delegates are able to attend on just one of the days where necessary. The daily programme is two, two hour, sessions held between 9am – 11am and 1pm – 3pm. Wednesday 4th May (day one) will focus entirely on Energy Purchasing and on Thursday 5th May (day two) the morning session (9am-11am) we will take a close look at Energy Metering whilst the afternoon session (1pm-3pm) will concentrate on Onsite Generation.

Russ Priestley - Senior Partner, British Independent Utilities Energy: who gets it right?

Industry lunch Kjersti Ulset - Manager of European Carbon Market, Point Carbon European emissions prices: a forecast – where are prices going and why?

Stuart Westerman - Director of Energy & Ancillary Services, Total Gas & Power The changing role of Suppliers in Future Gas and Power Markets

The Energy Lectures luncheon. On Wednesday 4th May (day one) the organisers will also host a 2-course lunch during which delegates can network with industry experts and peers. This will take place between 12pm-12.45pm, costing just £45, if you would like to attend the industry lunch please contact Shawn Coles on telephone number 01825 732670 or email


FREE to attend – register at: Sponsors:

Media partners:

Hosted by:




Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 3

Energy Exposure: Contents 4 5 6 8 12 14 15 17 18 20 21 22

Welcome to Energy Exposure Producing electricity in the UK: Past, present and future UK Electricity Market Reform Energy Trends – where are prices going? The Sensitivities of LNG The Shale Gas Story The Real Value of Energy Efficiency Managing energy – monitoring and targeting Smart Grid; active, dynamic and flexible consumption How much flexible purchasing should I do? Understanding Trade Credit Insurance The Energy Survey


will rts



Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 4

Welcome to Energy Exposure Welcome to Energy Exposure, a collection of Energy White Papers providing the latest news and views on a range of topics that impact the Energy End User. Included too are the results of the Energy Survey. We asked 500 senior energy buyers and finance directors across the UK their views on the issues that matter to them. Little surprise that most felt the UK lacked a clear energy policy and needed reforming with the cost of energy remaining their number one priority. Many also felt that current levels of legislation were adversely impacting their ability to compete. So in the wake of the Government’s proposed Electricity Market Reforms and subsequent consultation process, we’re sure you’ll be interested to read David Porter’s views on the issues faced in today’s low carbon energy world and the solutions the EMR must deliver. Dr John Constable, from the Renewable Energy Foundation, also highlights the probable and significant cost of the reforms to the End User questioning the arguments presented by Government.

Closer to home Alan Aldridge from ESTA makes a compelling case as to why energy efficiency measures are no longer just the domain of energy intensive industry. An energy efficiency programme makes good business sense and according to our Energy Survey, it seems that increasing numbers are putting in place efficiency measures despite a lack of support from suppliers. Latest metering technology is helping in this regard and Mike Hogg from Shell Gas Direct explains how Automated Meter Reading’s are helping businesses gain control of their energy costs whiles Alicia Carrasco of eMeter shows us the life changing possibilities of the smart grid. Finally, it looks as though energy buyers are becoming more sophisticated in their purchasing habits too with the majority of respondents to our Survey favouring the introduction of flexible energy contracts. This purchasing approach will certainly complement energy efficiency measures as businesses seek to better understand and manage their energy consumption. Richard Cockburn from Powerisk reminds us though of the importance of Energy Risk Management while Vince O’ Brien of Atradius looks at credit presenting the case for Trade Credit Insurance. n

Global events in recent months have reminded us just how interrelated the energy markets are across the world. The impact on energy markets from geopolitical as well as natural events was significant as traders and analysts rushed to assess the impact on supply chains and fuel resources. With the UK increasingly dependent on imported fuels including LNG we’re reminded how important it is to understand the global energy picture. Helena Wisden of Spectron gives a useful insight into the LNG markets and Richard Frape presents the wider energy picture, while Nick Grealy argues the case for Shale Gas suggesting we’ll soon be looking closer to home for our fuel supply solutions.

Shawn Coles Publisher Edge Business Media Leanne Broadbent Editor

Leanne Broadbent is a freelance energy specialist offering research, marketing and communication services to the energy industry. Starting her career with a leading integrated energy company, Leanne has seen the industry go through numerous changes from company divestments to implementation of new trading arrangements. As the industry continues to evolve, Leanne works with businesses to help them bridge the gap between themselves and their target audience (be it media, consumers or internal functions).


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Business in tomorrow's climate

Producing electricity in the UK: Past, present and future The present electricity market was designed to deliver reliable, competitively-priced electricity, with the advantage going to the cheapest fuels and technologies. When the climate change agenda grew in importance, the EU Emissions Trading Scheme (EUETS) was expected to provide the market with a price for carbon emissions which would steer companies’ investment towards low carbon technologies, which might otherwise be uneconomic. But, a history of political horse-trading over allowances and a lack of visibility beyond 2020 have weakened confidence in the Scheme’s effectiveness.

The UK set the benchmark 20 years ago when it privatised it’s energy industry but with low carbon challenges ahead, will Government proposed energy market reforms deliver objectives and pass the costeffectiveness test? David Porter takes a look. The UK currently has over 340 power stations over 1 MW, producing electricity from a variety of sources, from traditional fossil fuels to renewable energies as well as nuclear power stations, combined heat and power plants and energy from waste facilities. Most of these power stations are able to respond to changing demand for electricity in the UK and it’s the variety of different power stations and where the fuel comes from to power them that gives us flexibility in generating electricity.

So, the Government has proposed the Electricity Market Reform (EMR), intended to maintain the momentum for the development of renewables and encourage investment in new nuclear power and fossil fuels with Carbon Capture and Storage (CCS). A floor price for carbon, which the Government hopes will assure developers of nuclear power that they will have an advantage over high carbon rivals, is one of the proposals suggested. But, in itself, this is unlikely to be sufficient to secure investment. Other low carbon incentives, such as a premium feed in tariff or a contract for difference, are being contemplated.

But the UK’s power industry is facing huge changes. By the end of 2015, many coal and oil-fired stations will close down, as stricter European Union air quality targets take effect. By 2020, all but one of our nuclear power stations will have closed because they have come to the end of their operational lives. Further air quality legislation from the EU will see more fossil fuel power stations closing by 2023.

When the UK meets its EU renewable energy target, it will be courtesy of a huge amount of wind power. At times this will displace conventional plant and at other times it will contribute nothing to meeting demand. So, plant which can produce electricity to order will be required to stand and wait for the times when the wind does not blow. The financing of such plant could be challenging, so the Government wants to find a way to incentivise it through EMR. Controversially, it is also planning an Emissions Performance Standard (EPS) for fossil fuel power stations – a measure which could further undermine the EUETS.

To avoid a ‘generation gap’, we need new power stations, but by 2020 we also need to meet the UK’s mandatory target under the EU Renewable Energy Directive and to develop reliable, low carbon electricity production to meet UK and EU ambitions. The energy regulator Ofgem has estimated that £200 billion is needed across the energy sector in the next 10 years to make sure the lights don’t go out and the environmental objectives are pursued.

20 years ago, Britain privatised its electricity supply industry and liberalised the electricity market. Those world-leading measures took the industry off the Government’s books and delivered electricity at prices that have been below the rate of inflation. But, the low carbon transition will lead to higher bills for customers, so the mechanisms that shape the electricity market really must test positive for cost-effectiveness. n

The good news is that electricity companies are already investing - in gas fired power stations, offshore and onshore wind farms and numerous other small renewable energy projects. Planning consents have also been granted for further gas, wind and biomass projects. But power plants are major investments and in the present financial situation, investors are cautious. Their decisions rest on confidence about returns on a long-term asset and that confidence is influenced by many things, not least Government and regulatory policy. Clear, credible and stable policy is vital.

David Porter is Chief Executive of Association of Electricity Producers (AEP), the leading trade organisation for the UK electricity market.


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Business in tomorrow's climate

UK Electricity Market Reform that these policies will only increase bills by 1% in 2020, but this is an extremely misleading confusion of prices and predicted future bills. In fact the effect on prices is severe, and even on government’s own estimation in the Annual Energy Statement, 30% of the price of electricity to domestic consumers in 2020 will consist of policy driven charges imposed by law (£160 out of £512, or 31 per cent). Business will be hit even harder with environmental charges for the average mediumsized non-domestic user accounting for £404,000 out of £1.224 million, or 33 per cent.

As the Government embarks on the road to electricity market reform, Dr John Constable of the Renewable Energy Foundation examines the bigger picture, in particular the cost implications for the end user. There can be little doubt that the United Kingdom’s electricity markets need reform of some kind, and the proposals on which the government is currently consulting are a radical departure from the existing system. However, closer studies of the documents that accompany the consultation reveal real concerns.

Government’s 1% figure is based on the hope that energy saving policies will restrain energy consumption, in spite of economic growth and likely rebound and backfire effects, so that bills will be kept down in spite of the policy induced price loading. This is desirable, but improbable.

Principally, we are being encouraged to think that free market structures and the previous government’s lack of activity are largely to blame for our current and prospective difficulties. While it is certainly true that there has been a lack of clear investment signals to maintain security of supply through diverse conventional generating capacity, the market was in fact heavily distorted by deep and extensive state intervention. The Climate Change Levy (CCL), the Renewables Obligation (RO), the Emissions Trading Scheme (ETS), and the Feed in Tariff (FiT), to name the most important, are all testaments to the previous government’s attempt to steer the market towards particular outcomes, largely an extensive deployment of wind power.

When announcing the EMR in the House of Commons, Mr Huhne promised that he would ask for the 2010 Annual Energy Statement document to be recalculated for the new EMR policies, but he noted that he didn’t expect the results to be very different. This is somewhat puzzling. The documents released in the Electricity Market Reform suggest that the new policies will actually increase costs to the consumer up to the middle 2020s, when it is hoped that costs will fall (though this far out it is hard to have much confidence in such predictions).

The outcome of these measures as they combined with the British Electricity Trading and Transmission Arrangements (BETTA) was to leave the value of firm capacity unclear to the market, with the exception of gas. Even there, the encouraging signals were not strong, and security of supply has, unquestionably, been eroded. But it would be wrong to suggest that liberal markets were to blame; in an important sense, they were never given a chance.

In other words, the new proposals are not, on the government’s own estimates, cheaper in the short and medium term. In fact they are more expensive, and are unlikely to be the cheapest emissions reductions policies available. The Impact Assessment texts that accompany the EMR proposals make it clear that the new approach could add many billions over and above the cost of the previous climate change policies. This surprising outcome arises because although the new policies may well be more cost effective than previous instruments such as the scandalously defective RO, they are also more ambitious, and thus much more expensive. If gas prices remain low for the next decade or so the costs may seem intolerable.

Against such a background the present government’s proposals appear to be offering to reform a distorted market with a fresh set of even stronger distortions. In view of the limited success of government intervention to date, this may not be wise for a complex of reasons, all with financial roots.

Cost is not the only area of concern, and there must be real anxiety at the extreme complexity of the future UK electricity market, with elaborate systems of

The costs of the previous instruments, particularly the RO, are already very high. The government likes to say


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Business in tomorrow's climate

grandfathering to protect earlier subsidised investments being overlaid with new systems into which some projects may have the opportunity of transferring. Most significantly of all, as a result of these proposals a very large part of the UK electricity sector would be under state control. This is unlikely to be efficient, and may well leave the sector fragile, if not the wider economy. The Contract for Difference, for example, where a top-up payment is made for low carbon electricity if wholesale electricity prices are lower than a predefined point, is interesting, but it is not yet clear how it will be funded. The comparable Spanish system where the suppliers sold green electricity to customers at fossil-fuelled electricity prices, with the government making up the difference, has resulted in a very large Tariff Deficit, and the government now owes generators a total of ₏16.5bn, and ₏8bn of that to one company. The Spanish government is struggling to restrain further increases in the sum, and cannot finance its repayment without increasing the cost of government borrowing overall. No one would wish to see the same sort of thing happen in the UK. However, the large energy companies will be guardedly content with Electricity Market Reform proposals. For over a decade Government has been asking them to do very difficult, perhaps impossible, and very expensive things in the name of environmentalism. The EMR package shows that the UK government is willing to write a big, vague cheque on the consumer’s account to persuade the electricity industry to make best efforts to meet the targets. Whether the consumer will honour the cheque is an open question. n Dr John Constable is Director of Policy and Research at the Renewable Energy Foundation, a registered charity promoting sustainable development for the benefit of the public by means of energy conservation and the use of renewable energy.


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Energy Trends – where are prices going? capacity is due onstream this year in south-east Asia, Latin America and the Middle East, which may increase competition for LNG shipments; although some analysts suggest a current LNG production overhang is more than enough to satisfy this new demand and the increased Japanese requirements, so supply concerns may have been overstated.

With natural and geopolitical events of recent months reminding us just how interrelated and global our energy markets are, Richard Frape of Spectron takes a look at the factors influencing prices. UK gas and power prices rose 25% over the course of 2010, ending the year on a surge as the coldest December in 100 years propelled consumption levels higher and pushed short-term gas prices towards a two-year high. Prices then started to ease sharply at the start of this year, but have since been catapulted higher again by a triple whammy of majorly bullish events - the Japan crisis, the outbreak of Arab unrest and the introduction of a larger than expected UK carbon tax. Prices are now double their levels a year ago (for front Annual gas – March 2010 to March 2011). But are these events likely to have a lasting effect on prices and what are the other key issues to look out for this year that will be driving market direction?

While the weather has also improved, and taken some of the upwards price pressure away, some forecasters are predicting the UK will be colder than normal over the next three months. Any further bouts of unseasonably cold weather could reignite supply and storage concerns. On the other hand, Rough, the UK’s main storage facility, despite starting the year just 45% full – a much lower level than in recent years, has seen stocks recover strongly, which could reduce the amount of replenishment buying over the Summer.

Firstly, it is probably worth noting that the late 2010 surge was in fact much smaller than might have been expected given the intensity of the cold weather not only in the UK, but across Europe and the rest of the northern hemisphere, including super energy guzzlers the US and China (which helped drive oil and coal prices to 27month highs). The UK system coped remarkably well and supplies were never excessively squeezed, largely due to the arrival of record numbers of liquefied natural gas (LNG) tankers, while demand remained tempered by continuing economic uncertainty.

Source: Spectron

UK gas and power prices have been decoupled from oil prices for much of the last year (often moving in different directions) – so what has been happening to oil has in some ways been irrelevant. However, the fact that oil prices have now broken above the psychologically important $100/barrel level has changed this, and gas has shown signs it may be falling back under oil’s influence again. Geopolitics has been thrust squarely back into driving seat of the whole energy complex for the first time since 2008 and fears of another oil bubble could lead to other energy markets ramping higher in tandem, with speculative buying adding to the momentum. One saving grace may be that crude oil prices in the US have struggled to stay above $100/barrel – which may dampen the upside potential.

A perception that LNG UK supplies would remain plentiful for the coming months (helped by significant global LNG capacity growth) weighed on prices but the Japanese disaster was a complete game-changer with fears of largescale LNG diversions to Japan pushing the markets higher. We have seen before how fickle LNG supply can be at the best of times and how quickly it can change. In early 2010, the expectation of a global LNG glut was exerting strong pressure on UK gas prices, but by April prices were roaring higher as the Qataris took significant parts of their LNG production capacity offstream for extended maintenance. The maintenance season is expected to be shorter and more limited this year but may still affect supplies. Also, new LNG import

…Continued on page 10


Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 9

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The UK’s only major show dedicated to energy purchasing, metering & onsite generation Imagine… …an energy show where everyone you meet is relevant. …endless networking opportunities. …listening to the leading voices in energy procurement. …receiving targeted help and advice.

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Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 10

Business in tomorrow's climate

…Energy Trends – where are prices going? …Continued from page 8

Currently energy price movements are also significantly correlated to financial market movements, with news about the state of the economy driving sentiment, particularly on the longer term markets. While economic recovery seems inevitable, fears over double or multiple dips may continue to keep the market in check.

glimmers of hope following new discoveries west of Shetland. At the same time Norway, our biggest gas exporter, has indicated its gas production may decline from 2015; it has slashed its estimates for undiscovered gas resources by 31% following a lack of significant new discoveries last year. (Norway, which supplies Europe with 20% of its gas, has seen its oil output decline by 50% since 2000.)

Coal prices have been a key background driver of UK power and gas prices, and hit their highest levels since 2008 on the back of the Queensland floods disrupting production. But as production has returned to normal, prices have come under some pressure again. On the flip side, India’s coal minister says imports there may double this year, and analysts say that Chinese imports may increase by 27%, which will help shore up values.

But Europe is already making plans for new gas sources, with pipelines to the gas-rich former Soviet states being built and Iran also expressing an interest in using these pipes for westwards gas exports. Israel may too become a key new gas exporter – the biggest natural gas deposit discovered in the last ten years has recently been found off its coast. At the same time the gold rush to bring shale gas production onstream across Europe is bubbling away in the background, while reserves of “unconventional” gas from other sources – hydrates, coal-beds, tight gas etc. seem to be revised upwards almost daily. While the world has or is reaching a peak oil scenario, it is awash with gas, seems to be the conclusion. The key question is how gas will feature in the UK’s mix of energy sources going forward, as legislation continues to focus on a move away from fossil fuels, including gas, and cleaner energy may be a more expensive alternative. n

Several new power plants are due to come onstream over the next few months in the UK, improving production capacity and also reducing reliability concerns over ageing infrastructure. At the same time the operating lives of two UK nuclear plants have been extended for five years, and extensions of between 5-20 years are currently under discussion at other plants, which is all good news for the supply outlook, although several older plants have also just been mothballed for a year. Meanwhile the start-up of the BritNed interconnector cable between the UK and the Netherlands (commissioning flows initially but commercial volumes from April) will also give the UK an extra 1,000 MW exposure to Continental prices. This could help ameliorate or exacerbate price spikes, depending on market conditions at either end of the cable.

Richard Frape is Director of Market Services at Spectron, a leading provider of market data and analysis for the Gas, Power, Emissions and Coal markets in the UK and across Europe.

However, the planned UK power market reforms, which are set to be finalised this year, remain one of the greatest uncertainties. News of a new carbon tax from 2013, which will increase generation costs, added almost 5% to UK long-term electricity prices the day after it was announced, and further reform will only put further upwards pressure on prices, many believe, as costs are passed down the supply chain.

Longer Term In the longer term, diversity of gas supply sources will become a more important issue, particularly if the global nuclear backlash following the problems at Fukushima causes another “dash for gas”. UK gas production continues to decline by 8-10% annually so the reliance on other sources of gas will only increase over time, despite


Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 11



A leading UK food producer has cut its energy costs by

Phil Pearson, partner at A. Pearson & Sons, said: “Our

almost 20 per cent after installing new Automated Meter

glasshouses are run with a sophisticated environmental control

Reading (AMR) technology from Shell Gas Direct.

system that ensures the temperature is kept constant. The computer automatically contacts the Met Office four times a

A. Pearson & Sons produce more than 3,000 tons of tomatoes

day to prepare for incoming conditions as well as reacting

every year at its operations in the Cheshire countryside.

instantly to unexpected weather changes. This constant heating

Established more than 60 years ago, the family-run business is

and cooling means our gas consumption is very volatile.

now one of the main suppliers to supermarket giant Tesco. “Before AMR, budgeting was largely guess-work and we A Shell Gas Direct customer for more than a decade, energy

were exposed to additional costs for using more or less gas

is an important consideration for A. Pearson & Sons, due to

than predicted. The information AMR provides has given

the large volumes of gas required to ensure its 50,000 square

us a deep understanding of the relationship between what

metres of glasshouses remain at an optimum temperature.

happens in the glasshouses and our gas use. The upshot is, we’re no longer guessing - gas procurement has become

The business is also renowned for its innovative approach

educated decision making.”

to energy efficiency. Acknowledging that doubling the concentration of CO2 in a greenhouse can increase production

The new insight offered by AMR has seen A. Pearson & Sons

by up to 25 per cent, A. Pearson & Sons was the first UK

and Shell Gas Direct agree a bespoke contract, which allows

tomato grower to install a combined heat and power (CHP)

the company to buy 90 per cent of its annual gas supply on

system with CO2 extraction.

a fixed cost, dramatically reducing its exposure to risk and opening up significant savings.

AMR is the latest tactic in its drive to cut costs and improve efficiency. The technology is fitted to an existing meter and

“We’re forecasting almost a 20 per cent saving on our

communicates gas consumption data to Shell via SMS,

annual gas expenditure in our first year of using AMR, and

allowing customers to view their daily consumption at any

that’s a modest prediction,” continues Phil. “It’s freeing up cash

time through a secure website. It also enables Shell Gas

flow for us to reinvest back into energy efficiency initiatives.

Direct to have prompt access to up to the minute meter reading information and hence to replace estimated billing

“AMR is also going to be invaluable in providing the data

and physical meter readings with accurate invoicing.

we need to change staff behaviour and generally honing our practices to be as efficient as possible. We’ve been

For A. Pearson & Sons, this new insight into business-critical

so impressed with the results that we have now installed a

information has completely altered the way it buys gas.

second AMR device in our packaging site.”

To find out more on how your business could benefit from AMR, please contact Shell Gas Direct on 0800 0568 123

Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 12

Business in tomorrow's climate

The Sensitivities of LNG in production from the Tangguh plant in Indonesia will be balanced by declines at older facilities in the country.

The importance of LNG in the UK market has increased significantly in recent years. But what does the future look like for this global commodity? Helena Wisden of Spectron takes a look.

Due to the high cost of building liquefaction infrastructure, with recent plant costing upward of $20 billion and taking around four years to build, all LNG production is underwritten by long term contracts of around 20 years duration (with some contracts incorporating a certain amount of flexibility). General estimates are that around 20% of global production is divertible from long term contracts (although all contracts are structured differently and some will only allow diversions to certain, approved destinations) and in recent years traders have become more creative in seeking out diversion upside.

LNG supply sensitivities have increased enormously in the UK over the last three years, as Britain’s LNG dependence has surged. These supply nerves were jangled in the wake of Japan’s tsunami disaster, as increased LNG imports were seen as the most obvious and quick way for Japan to plug the energy gap resulting from damage to key parts of its power and oil infrastructure; LNG diversion fears then propelled UK gas prices higher. But are these fears justified given that just before the disaster analysts were saying that there was a global glut of LNG and that it was likely to last for some time?

Most LNG trading is currently done bilaterally between established counterparties where price is not always the primary driver behind deals – logistics and ship operations are equally important. In order to trade, counterparties need a legal document called a Master Sales Agreement, and each seller has a slightly different version. The details of delivery date and exact quantity are confirmed in a Confirmation Memorandum between the counterparties. Neither of these documents are standardised and the speed at which a new MSA can be completed depends entirely on the will of the counterparties to see a deal completed.

Global LNG production in 2010 reached about 215 million metric tonnes (305 Bcm), compared to 160.5 MMt in 2008 and 174 MMt in 2009. This massive scale up in production has come about due to a global increase in demand for gas fired power generation, and in the last few years around 15 countries have joined the LNG importers club from countries as far apart as Chile, Brazil, China and Kuwait. The surprise of 2010 was how the global LNG market somehow created the appearance of being more or less balanced, despite expanding at seven times the rate of the previous two years. Two cold winters in a row in Europe helped prevent a threatened supply glut, as the chilly weather boosted supply growth to average 6.2 Bcf/d (63.4 Bcm) year on year in the first quarter 2010. Economic and demand recovery in some areas, especially South America and the Middle East, helped support demand in the rest of the year and balanced slack growth in Asia’s traditional markets and Spain, the Atlantic Basin’s largest importer.

New entrants, particularly investment banks, continue to join the market and attempt to leverage their equity positions with producers to gain cargoes. Banks can at least take on the credit risk of trading with some less reputable counterparties but key suppliers are wary of handing over value. The incumbents are very reluctant to see the market open up and do not want to hand over upside margins to third party traders. They are also resistant to price transparency and the lack of a global index for pricing LNG keeps the market entirely physical. When considering all of this, it is important to remember that LNG is a new and evolving market where the supply and demand fundamentals continue to change regularly. Japan is one example of a particularly sudden development but there are other more measured major changes ahead, including the fact the US is gearing up to become a net exporter of LNG when little more than a year ago it was importing cargoes and

This year, 2011, should see a more moderate pace of growth generally – excluding Japan, with analysts expecting growth in global LNG output and demand of around 15 Bcm over the year, or 10.7 MMt/y as Qatar’s final train comes on, giving it almost a quarter of global production capacity, and new plants in Yemen and Peru speed up their rates of production. An expected increase


Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 13

Business in tomorrow's climate

competing with the UK for them. The emergence of a financial/paper market, possibly within 2 years or maybe nearer five or more, should also transform the traded LNG markets. What is clear is that LNG has moved the UK further away from the “energy island� status it used to have and made it subject to influences sometimes many thousands of miles away. LNG supply fears may have been overstated in the wake of the Japanese disaster, but LNG supply sensitivities are here to stay. n Helena Wisden is Head of LNG at Spectron, a leading provider of market data and analysis for the Gas, Power, Emissions and Coal markets in the UK and across Europe.


Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 14

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The Shale Gas Story term because the UK would inevitably lose just as the North Sea was declining further.

As the UK braces itself for diminishing fuel supplies, Nick Grealy of No Hot Air suggests shale gas technology will transform the energy scene as we know it.

So much for that theory. By 2010, gas production in the US rose by over 40% compared to 2006. The import terminals stayed empty and the gas earmarked for the US had nowhere to go but Europe. Prices collapsed in 2009, not because of the recession, but due to the fundamental shift in supply engendered by shale. What recovery there has been in 2010 in Europe was mostly weather related, but unless one wants to bet on a string of White Christmases, the outlook is for a glut of global gas stretching into at least the 2020’s.

The energy story of 2010 was what seemed to be the sudden emergence of a future permanence of abundant natural gas: The shale gas story. Most of us have heard something about shale by now, perhaps asking if it is just another energy breakthrough story that will end up being hype first and disappointment later.

Shale gas technology is now breaking out worldwide. North America has the technology, finance and infrastructure which enabled shale to emerge, but it doesn’t have a monopoly on actual geology. Shale’s future reach will be global, with discoveries almost everywhere. China and India are already well advanced in shale exploration, which will moderate their import demand and European prices.

That was certainly my reaction at No Hot Air, where I first broke the shale story in Europe as far back as summer 2008, when energy buyers were looking at, and even worse taking, prices of over a pound a therm for one or two (!) year contracts. Then as now, I tell end users that the worst energy risk they face is to get talked into believing they have one. Wherever possible, No Hot Air recommends taking a spot price that changes each month. Anything else is buying insurance, not energy, all while paying an extortionate premium for “security”.

But two other trends will introduce a new world of abundant supply and promises the death of oil linked gas. Firstly, the USA is converting import terminals to start in export mode by 2015. At NHA I predict that Europeans may indeed depend on a big, empty cold country full of bears for gas supply, but it will be Canada not Russia.

In that summer of the energy buyer’s discontent, I predicted that prices would soon collapse, mostly due to the influence of the massive new shale discoveries in North America. Shale, also called “unconventional” gas was always known to exist in rocks trapped deep below the earth. What was lacking was the combination of hydraulic fracturing and horizontal drilling that developed in North America early this century.

But shale gas will be found closer to home, as in Poland, Germany and France, but also at home. Shale technology is already making quick progress in Lancashire and other areas. This could be the best news for energy since the North Sea discoveries. Ignore shale at your peril. n Nick Grealy is principal and publisher of No Hot Air which offers consultancy services on the impact of shale gas to end users, financial institutions and regulators throughout the oil and gas industry.

At first, the technology stayed in what was called the Barnett Shale in Texas, where even in an urban area, new gas wells sprouted which changed first North American, but now global gas production beyond all recognition. As in the UK, the conventional wisdom in the early 2000’s was that gas was running out and six LNG terminals were built in North America to import gas from places like Qatar. That would mean a global gas market where the UK would have to compete with the US for cargoes. Stories were told to end users: fix long


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Business solutions today

The Real Value of Energy Efficiency Energy prices will continue to rise (worldwide demand for energy is expected to rise by up to 40% by 2030 according to BP), and then there is the imposition of carbon charges, such as the CRC Energy Efficiency Scheme for larger users, which will increase costs still further.

When energy costs represent only a few percent of overall operating costs, making the case for energy efficiency can prove a challenge. But viewed as part of a much wider approach to sound management, the case for energy efficiency becomes urgent argues Alan Aldridge of the Energy Services and Technology Association (ESTA).

Regardless of these cost pressures, surely any organisation should be looking to cut out waste. To be successful, organisations have to be focussed and lean. And that means in every department! In our view, the most successful organisations positively seek to integrate their energy and sustainability objectives with their business plans. Where these are aligned we see how they mutually reinforce core business objectives. For example, improving customer and visitor experience in hotels, supermarkets, hospitals, pubs and museums impacts directly on the number of visitors, revenue per visit and the satisfaction rating.

A political priority Tackling climate change – and specifically reducing carbon emissions from fossil-fuel use – has become a political priority. In parallel with the climate change issue, there are increasing concerns about the security of the UK’s energy supplies. A significant proportion is imported (much of our gas comes from Russia for example) and worldwide demand for fossil fuels is pushing the price of energy to new levels.

An essential feature of visitor experience is the environmental comfort level – not too hot, not too cold. A well balanced and maintained HVAC system will not only improve comfort but will operate with less energy, less waste and lower cost. While the technical aspects of environmental control will be of interest to the engineer and FM staff, the resulting benefits are basic business USPs for the marketers, sales people, business managers – so engage them and get them on board. And this is just one of many more examples.

While our dependence on imported fossil fuels for power generation is being addressed, switching to renewables or nuclear is not easy or inexpensive. The least cost and quickest solution is to reduce energy demand by as much as possible – which is where energy efficiency comes in.

At a local level While these may be strategic priorities for national governments, the picture looks quite different at the level of an individual business or public sector organisation. In a post-recession world, where the economy is only recovering slowly and money is tight, investment in an area which is only responsible for about 3% of operating costs (1-3% is typical for non-energy intensive organisations) may appear to offer only small returns. Yet that is a very narrow way of looking at energy efficiency. The real picture is quite different.

The supply chain The biggest organisations in the country in both private and public sectors have stringent procurement policies which include attention to the environmental policies of potential suppliers. Many indeed now have climate change policies too. Energy efficiency will be included under both. Potential new suppliers will be asked detailed questions about energy and environment-related issues. Furthermore, they will be expected to back these up with evidence. Large customers are not about to risk hard-won and expensive third party accreditation by purchasing goods and services from those without any such policies. Smaller organisations looking to supply larger ones should address their energy-efficiency policy as a priority. It is a first-step to proving one’s environmental credentials – one which need not be costly to implement and which will give a quick return on investment.

Energy costs come straight off the bottom line. If the profit level is, say, 5% of turnover, then energy costs are about half the profit figure. A 20% saving on energy costs (a typical figure according to the European Commission) represents a 10% increase in profits in this example. That surely is worth considering? And remember that energy efficiency measures go on saving, year after year.

…Continued on page 16


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Business solutions today

…The Real Value of Energy Efficiency …Continued from page 15

The fleet of foot SME will meet, or even exceed, these credentials and be able to offer potential customers supplies that fully support their business objectives. In a world where trading conditions are tight, this offers a way to differentiate your products and services from the competition. And once again, it need not cost large sums of money but can yield real financial benefit.

Why improve DEC ratings? A higher rating means lower energy and environmental management bills. Managing energy more effectively also means that for those businesses looking to expand, productivity can be increased without the associated increases in energy costs. It may also remove the need to upgrade the energy supply with all the disruption and cost that can entail.

Legal requirements

Funding improvements

The policy landscape is translating into regulatory requirements. The EU’s Energy Performance of Buildings Directive (EPBD) resulted in both more stringent Building Regulations and also in the introduction of Energy Performance Certificates (EPCs) and Display Energy Certificates (DECs). DECs are well-known in the public sector but are set to become more widespread. The latest revision to the EPBD will extend its reach to all buildings over 250m2 in both public and private sectors.

Finding the money upfront to improve energy performance can be the single biggest barrier to investment as the International Energy Agency noted in its recent report on Energy Efficiency Governance. The Green Deal, which the Government is steering through Parliament as part of the Energy Bill, will offer all sectors of the economy the opportunity to take advantage of efficiency measures without this upfront funding. Instead the costs will be paid back over a period of time through the energy bill.

A DEC is a snapshot of a building’s current performance. It has to be put on public display and renewed annually. So some form of energy performance monitoring will become mandatory for virtually all organisations within the next couple of years.

But why wait? Many improvements can be made at little or no cost. Many measures have a payback period of months rather than years. And for good energy efficiency projects, particularly but not exclusively in the public sector, there are a number of organisations offering third-party finance.

Once that data has been collected, it can be used in a systematic way to improve performance, eliminate waste and improve reputation. In a multi-site organisation, the DECs – which show energy consumption per m2 of useful space – will show which premises are wasting most energy. These can then be targeted for improvement first. In other words they provide a way of identifying the ‘low hanging fruit’ of energy savings.

Investment in energy efficiency almost always makes commercial sense, but not just in payback terms. Environmental, reputational and supply chain issues also impact on an organisation’s profitability and these need to be considered as well. Finally, cutting out waste wherever it occurs should be part of the core programme of any organisation.

Figure 1. Planning for steady improvement by using DECs.

Organisations do not need to invent spurious reasons to invest in energy efficiency. However, they do need to be innovative in identifying, clarifying and articulating where fundamental business benefits from such investments bolster the core business proposition. n Alan Aldridge is Executive Director of The Energy Services and Technology Association (ESTA). ESTA represents over 100 major providers of energy management equipment and services across the UK. For more details visit the website at:


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Business solutions today

Managing energy – monitoring and targeting The benefits are wide ranging – from the ability to track and compare gas consumption across multiple sites, to prompt and precise reporting. Access to this information allows trends to be identified and useful management data captured to drive and monitor the success of efficiency initiatives.

Mike Hogg, general manager of leading commercial gas supplier Shell Gas Direct discusses the tools major energy users are using to equip themselves for a new era of energy management. For many large volume energy users, the next few years are set to be defined by an increased focus on monitoring and targeting. The introduction of the government’s CRC Energy Efficiency scheme is ushering in one of the biggest changes in energy management the UK has seen for a generation.

The impact of AMR on energy management can be profound. By giving businesses a much deeper appreciation of the base load and volatility of their gas consumption, AMR allows them to work with their supplier in an informed way to select the most appropriate contract. This minimises the risk of consuming too much or too little gas and the resultant costs and penalties that can arise.

However, the regulations, which came into place on 1st April 2010, have not had the smoothest of starts. In October the Chancellor’s spending review revealed that the revenue generated through businesses purchasing ‘allowances’ for their energy use, would no longer be fed back into the scheme as financial rewards for high performing businesses. Instead, it is to be invested back into the treasury – a move which has led some to declare the scheme little more than a tax on carbon.

In the context of the CRC, early adoption of AMR will assist organisations in achieving a high ranking in the scheme’s league table. AMR is also accepted by the CRC as evidence of ‘early action’ – proactive measures to reduce emissions ahead of the scheme’s full adoption. Companies have until April 2011, to maximise their early action rating by installing technologies such as AMR. It must be stated that AMR devices are not the same as ‘smart meters’. Through the Industrial & Commercial Shippers and Suppliers (ICoSS) Group, Shell Gas Direct is working with its peers, OFGEM and DECC to ensure that the rollout of AMR is seen as “Industry Smart” – to be implemented in parallel to smart meters for domestic customers and small commercial customers.

However, the CRC (or rather what it represents) holds significant opportunities for UK business. The scheme’s league table system is set to reward forward-thinking firms with a kind of ‘carbon credibility’ that will offer a competitive advantage as green issues increasingly influence commercial decision making. As a gas supplier, we have long been keen to improve our customers’ understanding of their patterns of consumption – after all, monitoring energy use is the first step towards managing it. Automated Meter Reading (AMR) is one solution. The technology puts businesses in control of their consumption, by allowing access to accurate, dayto-day gas usage information at the click of a mouse.

With initiatives like the CRC, there is an opportunity for a much better flow of energy consumption data into industry boardrooms. Technology like AMR provides the tool needed to make this happen. Gas consumers should rightly view the CRC as an excellent chance to mitigate the environmental impact of business, but also as an opportunity to put that information to good use to understand their energy demand and protect their bottom line. n

The AMR device is fitted to an existing meter and electronically records the amount of gas consumed. This data is made available to customers via a secure website, where it can be displayed numerically or graphically, in a variety of units of measure and downloaded for analysis. It is also simultaneously available to the gas supplier allowing estimated billing and physical meter readings to be replaced with accurate invoices based on actual consumption.

Mike Hogg is general manager at Shell Gas Direct, a leading supplier of natural gas to UK businesses, in a diverse range of markets including manufacturing, the public sector, national retail, and energy-intensive industries.


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Business solutions today

Smart Grid; active, dynamic and flexible consumption Four Fundamental steps should be following to allow a successful Smart Grid:

With electricity such an integral part of our personal and working lives, how is technology evolving to enable us to be smarter when it comes to using it? Alicia Carrasco of eMeter shows us what the possibilities are.

1. Roll out of smart meters. In addition to basic capabilities such as remote reading, memory switching, prepayment diagnosis, and interoperability, there are other minimum functionality requirements that are recommended to enable Smart Grids. Such as measuring interval data as often as settlements in the market occur, aiming to track changes of the wholesale price responding to demand and the amount of supply available to meet it.

In our daily lives, with yearly average consumption of 3000 kWh/household in France or Germany, 4800 KWh in the UK and around 9000 kWh in the US, electricity is a necessary supply to the way we live and communicate. Electricity does not only enable economic development but is a pre-requisite for comfort, communication, entertainment, information, and security.

2. Enabling consumers to enjoy the benefits of smart meters no more that a few days after installation. These benefits include a web portal or a smart phone application where they could see details of their energy consumption, along with the context of price and even their CO2 footprint. To avoid delaying consumer benefits, utilities must have their IT and communication systems ready by the time smart meters are installed.

We need it, but we need to be smarter in how we generate it, how we consume it and how we balance supply and demand. Grids need to be smart to deliver power and to deliver it at the right time. The future of grid will not only be about transporting energy, but also about information, flexibility and efficiency.

3. Smart thermostats and smart appliances and optional access to real-time data through a Home Area Network (HAN) interface. For that, smart meters should include an interface to connect to on-premises networks. ZigBee is emerging as the de facto standard for this communication in the US, communicating between the meter and devices in the homes. The communications may be directly between the smart meter and smart appliances or through a gateway, or potentially both. Figure 1 illustrates communication via a gateway.

New technologies will enable both two-way communications and automation, and a more efficient and smarter energy demand. The Smart Grid is a rapidly evolving combination of new intelligent networks, information systems and regulations. The promise of Smart Grid is to allow utilities and consumers to manage energy generation, distribution and usage in real-time, and to collaborate to drive energy efficiency. Arguably, this promise will be most acutely demonstrated in the “last mile” of the Grid— that portion encompassing the infrastructure and management processes where utility meets consumer and supply vs. demand is optimised. As Smart Grid evolves, the organisational boundaries and business processes defining today’s utility will be broken and reformed, with interconnected communities of collaborating suppliers and consumers. Utilities will migrate from an operational model designed to interact with consumers on a monthly basis to one that supports on-demand, two-way communications supported by information processed in real-time.

4. Dynamic price will lead to dynamic demand. Consumers that sign up for automated demand response programs and control system can respond to different prices if they receive price signals or price information. Smart Grid will facilitate a smart energy demand, which includes any actions that energy users take to: Cut peak demand • Shift usage to off-peak hours • Reduce total energy consumption • Actively manage electric vehicle charging. • Actively manage energy usage to respond to solar,


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Business solutions today

Figure 1: Data interfaces, including HAN interface to a gateway

wind, and other renewable resources. For example, tell our dishwashers to run only when wind resources exceed a certain threshold previously established (our dishwashers could communicate with the grid operator’s computers to get this information via the HAN gateway). Purchase more efficient appliances and equipment, based on a better understanding of how each device uses energy.

save money. Smart Grid enables consumers to respond to signals and shift consumption from peak to off peak hours. Consequently, information and automation will facilitate smart consumption of electricity – the commodity necessary for economic development and the way we live and communicate. Smart grid is a win-win situation; it provides choice to customers, saving opportunities and a smaller CO2 footprint. n Alicia Carrasco is director for EAMA Regulatory Affairs at eMeter Corporation, a provider of energy information management services to the utility sector. It works with utilities to help them transform customers’ real-time energy data into information that saves money and reduces consumption.

All of these actions minimise harmful effects to power grids, while maximising savings to consumers and other energy users. Large energy users could benefit from dynamic demand programs, as Sainsbury will from implementing price-responsive automation measures in 200 of its stores’ heating and ventilation systems. These measures aim to manage the electricity consumption of equipment, responding automatically to second-bysecond changes in the balance between supply and demand on the grid. Enabled by smart meters and HAN interfaces household’s programmes input to balancing the supply - and the demand will be facilitated by aggregators. The economy is in a downturn; business and consumers are more conscious of their consumption and ways to


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Business solutions today

How much flexible purchasing should I do? enough. You will need to have in place a risk management system and a trading strategy. These will help your business achieve its energy procurement strategy without any unexpected surprises.

Flexible energy contracts have been available for a while but are they right for everyone and what are the associated risks? Richard Cockburn from Powerisk provides a useful reminder of the importance of understanding and measuring price risk.

A risk management system, or ‘risk rulebook’, will set out the risks to be measured and valued and will state the ‘risk limits’ the business is comfortable operating within. Risk limits help protect a business and are the equivalent of going to the races with £100 knowing this is all you are prepared to spend. Understanding and quantifying your energy price exposure on an ongoing basis is essential as your risk position will change from day to day as forward prices in the energy markets change. The risk limits will also account for market volatility as well as unwind time (the time it takes to hedge an unhedged position). All of this will inform your procurement process – or trading strategy - throughout the duration of your flexible contract ensuring you hedge at the right times to maintain energy price risk at levels the business is comfortable with.

Many clients ask Powerisk whether they should go completely flexible or completely fixed when reviewing their energy contracts. There is no simple answer because each company has a different appetite to risk. Flexibility is no panacea, and does need some careful management and input at the beginning. However, with a robust risk management system in place, it can reap rewards. So what is the choice? Signing up to a 3 year or 5 year deal at a fixed price will give your business some budget certainty. And when a market is backwardated – price for energy delivered today is more expensive than the price for energy delivered next year – locking in a longterm price will certainly be tempting. However, in doing this you remove any opportunity to gain from potential falls in price in the future. This may impact your business competitiveness especially if other players have the ability to procure their energy flexibly. It is therefore important to understand what flexibility means and whether your business is missing out.

While this might sound quite onerous, there are tools and services available that can help you get started. They range from simple web based reporting tools to more sophisticated energy management systems, all of which will pull in the latest market prices and generate risk reports. Some suppliers are even offering risk management services although the potential conflict of interest should be considered.

In a flexible energy contract, the terms of when and how much energy you purchase will allow for flexibility. For example, you may purchase a chunk or ‘tranche’ of energy at a fixed price for the duration of the contract but you then have the flexibility to build up to your full energy requirement by purchasing the energy on the forward market at different points in time. An energy market that is in contango – the price for energy delivered today is cheaper than the price for energy delivered next year – presents real significant value to those consumers able to purchase their energy needs on a flexible basis1.

So, if your energy procurement strategy allows for some energy purchasing flexibility, then your business has some energy price risk. It is important to quantify that risk and fully understand how a change in price will impact your energy purchasing costs. Doing this will enable you to manage those risks whilst capitalising on the flexible benefits as they arise. n Richard Cockburn is Director of Powerisk Ltd, an independent energy risk management company providing risk management advice, solutions and systems. 1

However, while there is value in flexibility, there is also risk. Prices move and can sometimes move dramatically in response to market information. Having some or all of your energy volume unhedged will give you exposure to energy price movements, and while the aim is that these moves will hopefully be to your benefit, ‘hope’ is not


For example full flexibility may see a consumer purchasing their energy requirements on a day-ahead basis (i.e. purchase today your energy requirement for tomorrow). With a market in contango, the ‘dayahead’ price may be some £5-10/MWh less that the price quoted for energy delivered next year.

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Business solutions today

Understanding Trade Credit Insurance Let’s look at it firstly from the energy provider’s perspective. Energy companies aim to provide trade credit to their customers, subject to status. In a worst case scenario, an energy provider lacking up-to-date credit information on a commercial customer may demand advance payment. We back our decisions with a conditional guarantee – in the event of default a claim is paid to the energy provider. In doing so, we provide certainty to energy suppliers that credit default won’t act as a drag on profitability.

Lack of adequate credit facilities can cause trade to grind to a halt. Here, Vince O’Brien of Atradius considers what tools can be used to keep the business machinery moving. As a leading trade credit insurer, Atradius is all too aware of the challenges faced in managing trade credit risk in many sectors, but none more so than the energy sector at present. We’re still in the throes of the worst downturn since the 1920s, and though media reports suggest rates of insolvency are levelling off, there are still some pretty notable risks waiting to take centre stage. There are austerity measures, increases in fraud, the ongoing abuse of “pre pack” insolvencies at the expense of unsecured creditors and fluctuating commodities prices to name but a few.

And as an energy user? Our aim is to facilitate trade, not to stop it. We want the energy company and their customer to leave happy so it is crucial that businesses we approach on behalf of an energy company provide us with the most up-to-date information possible. In addition, as an energy customer, having trade credit insurance yourself immediately makes your business a more attractive, secure trading prospect, not just to energy providers, but also to lenders such as banks and other suppliers. In short it means everyone is going to get paid, no matter what the circumstances. Pretty invaluable in these turbulent times.

So what does trade credit have to do with energy procurement? Well quite a lot. Continuing economic uncertainty means credit default risk remains high. Over 90% of business transactions in this country still rely upon a credit arrangement of some sort demonstrating that credit is the oil on the wheels of UK plc. And it is critical that UK businesses do whatever possible to ensure that credit levels are sufficient to facilitate healthy levels of trade to get the economy back on its feet. The energy sector plays a major part in this.

Trade credit insurance isn’t for everyone – but for a business of any size confronted with trade credit risks in this climate, the advice remains simple: if insuring isn’t for you, then take other measures to mitigate your risks. Now is not the time for UK plc to put its head in the sand. n

Trade credit insurance is one option that works well for energy providers and their commercial consumers alike. At the moment about 15,000 UK businesses ranging from plcs to SMEs, use trade credit insurance as part of their credit management strategy to cover as much as £3 billion of trade per annum – with good reason. Though trade credit insurance may not be the first thing that springs to mind when examining credit in the energy sector, it plays a valuable part in thousands of energy contracts both in the UK and the rest of the world.

Vince O’Brien is Head of Key Accounts at Atradius, providers of credit insurance and specialists in energy related trade credit contracts. Find out more at

Trade credit insurance does two things. Firstly, it uses a vast resource of information to determine whether the business in question represents a viable trading risk for their policy holder and to guide them away should that risk prove potentially damaging to their business. And secondly, trade credit insurance pays out on a claim in the event of that risk unexpectedly defaulting on payment.


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The Energy Survey With nearly 500 responses to this years Energy Survey of senior energy buyers across UK business and industry, the results provide a clear barometer of business sentiment across the UK.

Do you think the UK has a clear energy policy? Yes: No:

22.99% 77.01%

Do you think the UK electricity market needs reforming?

In this year’s Energy Survey, we asked 500 energy professionals the big questions about UK energy policy, supplier performance and business priorities. Targeted at energy procurement professionals, Finance Directors and senior management across UK business and industry, the results provide a clear barometer of sentiment in the UK today.

Yes: No:

79.77% 20.23%

Do you think the UK gas market needs reforming?

Against a backdrop of proposed energy market reforms, global uncertainties, climate change policies and economic pressures, we asked those involved with energy procurement their views on the proposed Electricity Market Reforms and how legislation is impacting their competitiveness. We covered billing, energy efficiency and flexible contracts and we found out what the number one priorities are in UK boardrooms today.

Yes: No:

76.55% 23.45%

Is UK industry becoming uncompetitive due to current energy legislation & regulation? Yes: 65.52% No: 34.48%

The results show that there is discontent in industry and that the Government still has a long way to go to garner business support for its green agenda. Competitiveness is a concern and energy costs remain the number one priority, while suppliers clearly need to do more to help businesses with their energy efficiency programmes. Increasing numbers are turning to flexible energy contracts and this raises the question as to whether they’re getting quality support and advice about their energy risks.

Is nuclear energy the key to a low carbon economy? Yes: No:

65.06% 34.94%

Are energy suppliers offering enough incentives to buy green electricity? Yes: 7.36% No: 92.64%

The Government has presented its proposed Electricity Market Reforms and has sought views as part of its consultation process. According to our Energy Survey it is clear that the majority of UK businesses (80%) believe that the UK electricity market does need reforming and a similar number believe the gas market does too. Only 24% of our survey respondents felt that the UK has a clear energy policy and a concerning 65% felt that UK Industry was becoming uncompetitive as a result of current levels of legislation and regulation. It looks as though the Government still has some way to go when it comes to convincing business of the need for nuclear (and the survey was conducted before the terrible incident in Japan) and suppliers clearly aren’t doing enough when it comes to promoting and incentivising green energy.

When asked about their own energy efficiency measures, just 12% of respondents listed Carbon Reduction as a number 1 priority with 85% suggesting that enough still wasn’t being done to stimulate energy efficiency among UK companies (with a majority 70% citing the CRC as just another green stealth tax on business). Over 80% of respondents felt their energy supplier was not helping them to reduce consumption either. However, despite this, nearly 70% of those surveyed did have in place a clear energy efficiency programme and with a similar number reporting Cost of Energy as a priority in the Board Room,


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or worryingly, performing no risk management at all. The solution may lie in better regulation with 65% feeling there was insufficient regulation of energy consultants, brokers and third party intermediaries.

it seems that energy efficiency falls under the Cost Reduction rather than Carbon Reduction heading.

What is more important to your board of directors or senior management? Most Average Least Carbon Reduction: 11% 28% 61% Cost of Energy: 67% 26% 7% Security of Supply: 22% 46% 32%

Do you think energy prices will rise or fall in 2011? Rise: 73.33% Fall: 0.92% Remain volatile: 25.75% Has the introduction of flexible energy contracts in recent years been a good thing? Yes: 78.62% No: 21.38%

Is enough being done to stimulate energy efficiency among UK companies? Yes: 15.63% No: 84.37%

Do you use energy consultants, brokers, third party intermediaries to assist in your energy procurement? No: 45.98% 1: 42.99% 2: 7.36% 3: 0.69% 4 or more: 2.99%

Do you believe the CRC is just another green stealth tax on business? Yes: 71.03% No: 28.97% Is your main energy supplier helping you to reduce your energy consumption? Yes: 17.01% No: 82.99%

Do you think there is enough regulation of energy consultants / brokers / third party intermediaries? Yes: 34.71% No: 65.29%

Does your organisation have a clear energy efficiency programme in place? Yes: 68.28% No: 31.72%

The suppliers will be pleased to read that the majority (74%) of those surveyed felt their energy supplier was providing accurate billing with a greater number still reporting timely billing. However, it is important to acknowledge the 125 respondents unhappy with the accuracy of their billing showing that the industry still has some way to go to achieve complete customer satisfaction.

Does your organisation have any installed onsite generation? Yes: 34.94% No: 65.06% Little surprise then that around 350 of those surveyed expect energy prices to rise in the coming year and just over a quarter anticipate volatility to remain a feature of the markets. And with nearly 80% reporting that flexible energy contracts are a good thing for the energy markets, it seems that most energy procurement specialists see these as a necessary tool in the current climate. What is interesting though is that less than one half of those surveyed use third party assistance (consultants and/or brokers) in their procurement process suggesting that a significant number of energy users with flexible contracts are either performing their own energy risk management

Is your main energy supplier providing timely billing? Yes: No:

81.84% 18.16%

Is your main energy supplier providing accurate billing? Yes: No: 23

73.33% 26.67%

Energy White Paper 24+4pp_Energy Update 10/04/2011 14:50 Page 28

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Energy Exposure - Spring & Summer 2011  
Energy Exposure - Spring & Summer 2011  

Independent Energy White Paper