Demand-side savings mount for large electricity users

Spiralling third party electricity charges are making demand-side management a much more attractive option for business electricity customers, says Mark Alston.

Major energy users are looking for a lifeline when it comes to cost, and demand-side management may just give them what they need. Energy prices are being pushed up by hefty increases in transmissions charges, and by the subsidies paid to support low-carbon generation. Companies that rely on large amounts of electricity need to mitigate that mounting cost.

Half-hourly metered commercial electricity customers are particularly concerned and are actively seeking advice on ways to reduce their peak consumption as hikes in transmission charges take effect.

We are advising clients to think strategically about the energy efficiency options open to them when they renew their energy contracts. We are also promoting active participation in National Grid’s demand-side balancing reserve (DSBR) auctions.

A recent report from Cornwall Energy highlights the magnitude of the problems faced by those on half-hourly meters.

The February report, Third Party Charges for Energy Forecasts 2014-15, predicts that overall third-party costs for half-hourly electricity users will increase by 4 per cent in 2015/16 and 10 per cent in 2016/17, compared to a 2014/15 baseline.

The report’s analysts forecast that while Ofgem’s new price controls will bring a 14 per cent reduction in distribution charges for 2015/16, all other charges will go up, particularly the cost of transmission, which is predicted to jump by 16 per cent in 2015/16 and a further 14 per cent in 2016/17.

Then there are the costs associated with support for low-carbon generation. These are expected to show substantial movement. The Renewables Obligation alone (already the second-largest third-party cost) is forecast to rocket by 19 per cent this year, with another 12 per cent hike in 2016/17.

Meanwhile, other elements (feed-in tariffs, the Climate Change Levy and the new feed-in tariff contracts for difference) combine to drive green support measures up by 15 per cent in each of the next two years to become around 55 per cent of total third-party charges by 2017. While general energy efficiency measures do produce incremental savings, it is important to remember that the best returns arise from targeting peak times when network charges are highest.

In distribution networks, the massive weighting of usage charges towards “red band” periods is incentivising “peak lopping” across the UK. For those organisations with the flexibility to avoid usage at peak times, demand reduction is therefore a no-brainer.

The first priority is to avoid triad periods (the three highest half-hour demand periods on the electricity system per annum, such as winter tea-time). By minimising demand or maximising on-site generation during triad periods, organisations can avoid transmission network charges, which have risen dramatically over the past ten years.

There is also a new incentive to reduce peak demand via the DSBR auctions (plus various other local distribution networks’ schemes). However, before organisations take any action to reduce peak demand, they should check whether they have a pass-through contract, where savings in third party charges benefit them, rather than the supplier.

Pass-through contracts are gaining increasing levels of interest – even from those who are not able to manage their load. The attraction is that they allow major commercial customers to pay only the published rates of third party charges, rather than paying a premium for the supplier to shoulder the risk.

All companies using significant amounts of electricity, particularly those spending in excess of £150,000 a year with half-hourly metering, are likely to start exploring the potential of demand-side management this year – if they have not already done so. It may have been something that was considered in the past and rejected due to relatively small rewards, but with spiralling third party charges the benefits are now much more compelling.

Mark Alston, director, Ener-G Procurement