Don’t let circumstances fool you!

London by night

Inflation in the Eurozone has turned negative, official figures have shown, with prices in December 0.2% lower than the same month a year earlier.

The falling oil price is the immediate cause and there is, up to a point, a positive aspect to that for the Eurozone. It reduces costs for the majority of businesses and leaves consumers with more to spend on other items.

But there can be what the European Central Bank President Mario Draghi called second round effects. If this deflation influences expectations and is reflected in future decisions about prices and costs management, it could become entrenched.

To make the most of the current conjuncture, we believe that companies should invest into energy saving measure in order to secure a more steady growth in the long run as electricity prices will not be driven down.

Electricity is generated from a range of sources – renewables like wind, solar and wave; nuclear; and of course fossil fuels like gas and coal. Although our dependency on fossil fuels is slightly less than it was we still rely on coal and gas. Oil is used in backup generation not in power stations which is why there is very little in the electricity supply chain that benefits from reduced oil prices.

Increased demand and the decommissioning of a number of existing power generation plants is the reason why electricity production may not meet demand. Estimates vary as to how close to capacity we are in the UK but with colder weather, higher industrial output and stronger employment the demand on the grid is increasing. In larger organisations responsibility for this falls to the energy managers and the more prevalent facility managers who increasingly find their time being dedicated to managing energy consumption in order to keep their fuel bills under control.

Flying a plane of several hundred people from London to New York may become cheaper next week but it is highly likely that running an office in the city with lights, computers and modern facilities will cost more, this is because there are major pressures on electricity prices that are not linked to fuel price. Also, whilst gas prices may fall in the short term this trend could well reverse very rapidly because there is an increased demand for gas, especially LNG, that means Britain is competing for supply.

Some manufacturers for instance report that energy bills make up 35% of their total costs. Prices are extremely volatile. It makes running a predictable business model quite challenging. Worse, with such high costs, businesses may be forced to pass on the price of energy to customers.

Some businesses have responded by changing the way they manage their energy contracts. Michelin for instance has an energy bill of approximately £20m a year and since the company first employed a dedicated energy manager at each site it has saved 20% in five years.

The Energy Managers Association (EMA) was set up by Lord Redesdale in February 2012 to represent Energy Managers across all industries. Their priority is to get the position of energy management experts recognized as a profession while sharing best practices and promoting the development of tools and legal framework around it. According to their Chief Executive, Lord Redesdale, these measures include technology as well as changing the behaviour of all employees. ‘We don’t throw a toothpaste tube away after one use and yet we leave our transformers plugged in 24/7. Sure, a lot can be left to smart people implementing some very clever technology but a real difference can be quickly and cheaply made through simple, common sense training which is already beginning in many organisations.’

The EMA recently brought 3,000 energy users and suppliers together at the Energy Management Exhibition, EMEX. A quick survey of registered attendees showed that between them they spent over £5bn pa on energy. The cause for most hope is that they also said that they planned to spend around 20% (£1bn) of this on energy efficiency measures in the next year alone.

So while there is a glut of oil production leading to cheap petrol prices the same cannot be said of energy. If we are to avoid brown-outs and soaring prices we need everyone to join this small but informed army reducing their demand.