The market situation in the early months of 2022 was to say the least, extremely bleak. At that time the situation looked at its darkest. Then came the invasion of Ukraine and the outlook turned from charcoal grey to bituminous black. Is there any light at the end of this incredibly dark tunnel?
In the UK and on the European mainland we have been blessed with exceptionally low gas prices for many years. One of the reasons for these low prices has been an extensive natural gas pipe network, stretching from Siberia to Swansea. This distribution web carried a near endless flow of natural gas, rich with methane extracted from sub seafloor and underground deposits. However, this true interconnectivity is fragile.
On the 24th of February 2022 when Russia invaded its neighbour, this delicate energy dream turned into a nightmare. Russia is the second biggest producer of natural gas globally after the USA, by a very long distance. Their yearly production totals more than the third, fourth and fifth biggest producers (Iran, China and Qatar) combined. Russia also sits on an extensive, currently untapped, natural gas reserve. In fact, it tops the list of global natural gas reserves, with more than three times that of the USA.
In 2020, Russia had an annual natural gas surplus of nearly 230 billion cubic metres. This surplus is the net amount of extracted natural gas remaining once Russia has consumed its domestic share. Where does all this excess natural gas go? Primarily to Europe, the majority of which is supplied via the Nord Stream 1 pipeline.
The amount supplied through Nordstream 1 is approximately one third of all Russian natural gas exports to Europe. This equates to roughly 822 billion kWh per year (822 TWh). For context, the UK consumed around 770TWh of natural gas in the whole of 2021. The shut down of Nord Stream 1 has essentially removed the equivalent of more than the United Kingdom’s annual total gas requirement and it is not looking likely that the gas flow will resume any time soon.
With winter approaching, high gas prices are set to rise, as is the case each year when the weather turns coldest. Fortunately, gas storage levels on the EU mainland have, at a very high cost, reached the average 80% requirement for the winter season. At least for now EU lights will stay on. People will, for the most part, stay warm. In the short to medium term the market shows little sign of the drastic easing required to return to normal market conditions. We are quite literally at the mercy of mother nature. If we see a very cold winter, either in the EU and or Asia, the prices we will see this winter could feel moderate compared to the winter of 2023.
Gas is not just a source of heat. In the UK natural gas accounts for approximately half of all our embedded electricity generation. In many EU member states this proportion is higher. Any increase in gas has a direct, if not like for like, increase in the price of electricity. For the next 18 months the wholesale market price of both gas and electricity is unlikely to be moving far from current levels.
With the newly announced support package which promises to fix wholesale prices from October 1st, households and businesses will at least have some protection from the price rises. Those purchasing on open market, flexible contracts, will also be protected but to what extent and for how long is yet to be finalised. Those most effected will be organisations with high risk purchasing strategies. This type of procurement may have led to minimal mid to long term forward purchasing, leaving organisations at the mercy of the near-term futures, day ahead and spot price markets.
Through all the doom and gloom it is hard to feel positive, but there are two slight glimmers of hope. Firstly, energy efficiency has never been so high up the political agenda, both in the UK and the EU mainland. This increased focus will undoubtably shape energy strategy for years to come and will hopefully promote energy efficiency to the forefront of strategic thinking. The place where it thoroughly needs and deserves to be.
Secondly, the payback on energy projects has greatly improved. Although general inflation has increased the price of goods and services associated with improvement projects, energy inflation in isolation has far outstripped this general rate. This differential makes energy conservation projects very attractive. The same can also be said of localised energy generation projects. With the qualification date for ESOS phase three on the 31st December fast approaching, organisations are currently well positioned to capitalise on both the increased focus on energy efficiency projects and favourable financial returns.
Projects which are now very attractive primarily fall into four categories: projects with very low to no external investment and exponentially large returns, projects which move from outside internal payback requirements to attractive propositions such as projects with five year paybacks reducing to three, projects which enable fuel switching from fuels which are at risk of market volatility such as gas to comparatively lower cost and more price stable fuels such as biomass and finally projects which enable low cost on site electricity or heat energy generation particularly those powered from naturally occurring free resource such as solar, wind and hydro.
Prime examples of low investment, high returns are those associated with systemic change, namely management system implementation and behaviour change programmes. One example of the attractiveness of these types of projects has been realised by one of JRP Solutions’ clients. Here a behaviour change strategy is being developed, putting systems in place to embed the knowledge, processes and skills required to affect real change. The financial return of this project was estimated to be in the region of £125k twelve months ago, when energy prices were fixed at a relatively low rate. With increased energy costs these savings have more than doubled, with returns now forecast to be in excess of £400k per annum. The external investment for this solution is set to be in the region of £50k, realising a simple payback of less than two months.
Projects in the second category, now in the favourable payback zone, include opportunities such as: variable speed drives on smaller or intermittent use motors, compressor upgrades and compressor control systems, building management system installation and upgrades, ventilation control systems e.g. CO2 control, building insulation, boiler upgrades, hot aisle/cold aisle containment, free cooling, chilled water upgrades, heat recovery systems and many more. These projects may have historically had unfavourable paybacks but are now perfect for revisiting. With energy costs on average more than doubling, paybacks are likely to have fallen by at least 30%, even with the increased implementation costs brought about by a rise in general inflation.
Thirdly there is the prospect of switching energy generation sources. With the near removal of natural gas from our power generation and heat generation networks a non-negotiable requirement for the net zero transition, this is a short-term opportunity to exploit the current economic favour of these types of projects, for long term gains. For example, switching from natural gas boilers to responsibly sourced wood fuelled biomass alternatives has now become much more attractive. With a sustained supply of wood pellets at a price of approximately 5p/kWh and zero net carbon emissions verses generation from gas sources of up to and above 12p/kWh, switches such as these are now viable options. It is also possible to secure long term fixed price contracts for biofuels. These contractual arrangements have the benefit of increasing budget certainty, which is good for general business planning.
The final category for consideration is on site generation. Historically, without Feed in Tariff (FIT) or Renewable Heat Incentive (RHI) support, the installation of decentralised, relatively small-scale on-site generation projects would have paid for itself in approximately 7-8 years. This depended on size, usage factor and ancillary storage plant installation, such as batteries. Equivalent projects with current energy prices are now offering returns in the region of 5 years. Should energy prices fall, as is the case with all these projects, paybacks are likely to increase. However, the sums currently add up and all explored project categories are shaping up to be favourable prospects, even if energy costs do fall in the medium term.
The global market is currently extremely volatile, with the energy market being most volatile of all. It is not clear exactly how the coming years will unfold, but what is clear is that with sustained supply restrictions from Russia, a transition away from Russian utilities, maintained demand for gas usage in the medium term, a weak pound sterling exchange rate and high demand for LNG from Asia, the era of cheap gas is at an end, at least for the foreseeable future. With most energy efficiency projects paying for themselves within favourable payback periods, now is the time to revisit opportunities which may have seemed unfavourable in recent years. It is the time to engage a competent Lead Assessor for the upcoming phase of ESOS (beginning 31st December 2022) and it is the time to raise the profile of energy improvement projects to the high status that they deserve.
The upside to all of these drives to save energy costs is, of course, that energy savings result in a direct and immediate reduction to Greenhouse Gas Emissions. The beauty of energy efficiency improvements is that they can be done here and now. They are immediate and tangible. Emission reductions are not exactly unintended consequences to the current energy crisis, but in the global endeavour to act against climate change, they are certainly very welcome consequences and maybe just a little silver lining to hold onto.
JRP Solutions are specialist energy, Net Zero and facility and asset management consultants. They’ve been using their passion, expertise and commercial understanding to make a real contribution to their clients’ organisational objectives and to reduce environmental impacts since 1999. For more information on JRP’s services email [email protected] or call 0800 6127 567.