Six measures to mitigate energy costs in volatile times

Businesses in the UK are having to navigate high and volatile energy prices. Whether it is a small start-up or a large enterprise, energy costs are likely to have a bigger impact on the bottom line for some time yet.

It is worth noting that this period of turbulent energy prices we are witnessing is unlikely to pass in the short term. Crude oil and natural gas prices were already rising in 2021, as structural shortfalls in supply failed to keep up with surging post-pandemic demand. The current conflict in Ukraine has served only to exacerbate the situation and increase energy price volatility. And given market fundamentals in global oil and gas will remain tight even after the conflict ends, a higher energy price environment is likely to persist for the medium term.

To put this into context, UK gas and electricity wholesale prices have hit historic highs. UK National Balancing Point (NBP) gas for example traded on average at about 223 GBp/therm in Q1 2022. This is six times greater than the average daily price between 2015 to 2020. As for power, it traded at 208 GBp/MWh, five times greater for the same period.

While there is limited support coming from the government, in contrast to the consumer market, there are some measures businesses should consider to mitigate higher energy costs. However, it’s safe to say there is no easy fix to this problem.

If you are a business that relies heavily on natural gas feedstocks as an input, such as fertiliser producers for example, there may be limited options to reduce energy costs aside from reducing output.

That said, given we are likely to be in a high energy price environment for the medium term, there are a few measures businesses could consider when tackling energy costs:

1. Review immediately the structure and timing of energy contracting strategies. If a business hedged before the recent price volatility and those hedges have some time to run, then they are in a good position. But for those with hedges due to expire or those operating unhedged, they will need to assess what the financial impact could be if they choose to either remain unhedged or contract at current price levels.
2. Consider the adoption and implementation of energy efficiency measures. Examples include ensuring the proper insulation of buildings; efficient lighting is installed; and sourcing on-site renewable energy generation (such as installing solar PV panels on roofs). Needless to say, delivering all of this brings associated benefits such as an enhanced ESG (environmental social governance) corporate reputation.
3. Explore demand management options. This can range from ensuring all office equipment is energy efficient to reducing energy demand by staggering work hours and start times. Also for businesses with heavy equipment and factory equipment, running this during the evening and early morning hours, while conserving energy throughout the day, may be a feasible option, as can exploring the use of flexible revenue streams from demand side management.
4. With flexible working now an embedded office culture, is it time to consider down-sizing the office footprint? Post-pandemic, flexible working is more commonplace and some businesses are already moving to smaller, more energy efficient premises while developing interesting hybrid workplaces for their employees.
5. Invest in analytics software to understand energy usage patterns in the business. Better understanding will inform decision makers to assess where consumption levels can be trimmed.
6. Educate employees on the importance of energy efficiency. Explaining to employees what the business can do to reduce energy consumption levels will need to be underpinned by the right behaviours.

None of these measures in isolation are likely to have a material impact. However, collectively they will deliver incremental benefits. They also reflect the Environmental, Social and Governance behaviours businesses need to demonstrate from employees up to management leadership. This will generate associated benefits across other stakeholders from investors to consumers and broader society.