Developing robust hedging strategies and controlling energy consumption are some of the most effective ways for a customer to reduce the cost of their energy, amid Britain’s high energy prices.
This was a view expressed by speakers during the first panel discussion of the Summit on Procurement and Revenue from Renewable Energy Sourcesheld this week in London by Solar energy portal publisher Solar Media. Claire Thornhill, director of economic consultancy Frontier Economics, set the tone for the conversation, pointing out that Britain is currently struggling with “really high” energy prices, especially for industry.
“The latest figures from the Department for Energy Security and Net Zero (DESNZ) show these are the highest among IEA countries, and 60% above the IEA median, so you can see why this is a hot topic,” Thornhill said. “This obviously has consequences for individual companies and also for the extent to which the economy can grow.”
Thornhill then asked a number of buyers how best to operate in this environment, and experts from both Philips and Heathrow Airport said that robust hedging is a crucial part of an effective renewable energy purchase agreement.
“Having an active hedging strategy is important, especially in times like these,” explains Yassine Bounajma, category sourcing manager for global industrial suppliers at Philips.
“We make all our own hedging decisions internally; what we are reviewing is that we have a very clear target of what we want to achieve with that,” agrees Simon Wilding, senior category manager for energy and utilities at Heathrow Airport.
Wilding also suggested that buyers must recognize and accept that they will make suboptimal purchasing decisions, and be willing to learn from these mistakes; as he put it, purchasing power in today’s UK market is “an art, not a science”.
“Sometimes we get it right, sometimes we get it wrong,” he said. “You have to be comfortable with doing it wrong, because you’re going to do it wrong, and with not going for the lowest possible price, because you’re not [always] I’m going to choose the lowest possible price.”
For individual customers, Bounajma suggested that individual companies could do more to improve their understanding of power purchase agreements (PPAs) and power price trends.
“In markets like Britain, for example, a large part of energy costs are on the non-commodity side, so it is important to understand the different cost components,” he explains. “Building internal expertise is crucial in a company.
“One thing we’ve done at Philips is set up a global energy committee that meets regularly to discuss all these topics, like make versus buy, for example, and the strategy around hedging. It’s important to build this stakeholder buy-in.”
Challenging economic conditions for Britain as a whole
These could be crucial steps to protect a company’s balance sheet, as high energy prices in Britain create challenging economic conditions for trading more generally, according to other panellists.
Rachel Cary, head of industrial strategy at Energy UK, called high energy prices “an immediate competitiveness issue” as industrial players are most affected by the situation.
Gus Majed, group CEO and founder of the Paratus group of companies, added the ongoing crisis in the Middle East and its impact on the global fossil fuel sector continues to disrupt UK energy prices. As renewable energy becomes an increasingly important part of the UK energy mix –Solar energy alone met 35% of the UK’s electricity demand for two days in April– Majed noted that 55% of the country’s energy mix is non-renewable, and this small majority “really determines marginal pricing and marginal costs.”
“For Britain, the marginal price is determined by gas and if global demand growth happens on an LNG basis, these differences will flow back into Britain,” says Majed, who goes on to describe LNG in Britain as “incredibly undervalued.”
However, Majed argued that the crisis in the Middle East has pushed renewables to become a “serious” part of the UK’s drive for energy security.
“This oil crisis has led to a sharp return to renewable energy sources,” he explains. “Renewables were once to some extent a political ESG manifestation, now we are moving towards serious energy security [contributor]and I’m incredibly optimistic about renewables right now.
However, he admitted that “we will have a period of very high, very volatile prices” as part of this transition, and that more time and effort will be needed to remove some of this volatility from Britain’s new energy mix. Majed asked rhetorically: even if there is greater penetration of renewable energy in Britain, “how can this be solved?” and offered: “It has to be solved through the transmission mechanism and the batteries, and that takes time and investment.”
Solar Power Portal published Solar Media hosts the Summit on Procurement and Income from Renewable Energy Sourcesthis week in London. The event will cover PPA design, tackling high energy prices and more; for more information, including the full agenda and ticket options, visit the event website.
