UK: THE CUTTING EDGE - FUEL BILLS - CONTRACT ENERGY MANAGEMENT. - A growing band of specialists is reducing industry's fuel bills and making a healthy profit for themselves.

by Nick Hasell.
Last Updated: 31 Aug 2010

A growing band of specialists is reducing industry's fuel bills and making a healthy profit for themselves.

Mention the word 'outsourcing' to a businessman and the chances are that he'll run through a whole gamut of services before arriving at energy management - if, indeed, at all. For the hundred or so businesses in the UK dedicated to reducing companies' fuel bills, such invisibility is a perennial problem.

For a start, the industry, if it can be called such, is rather hard to define. It ranges from pure tariff analysis - the scrutiny of a company's bills by a specialist, followed by a recommendation as to the best price at which a unit of energy can be purchased - to large-scale project management - the installation of a combined heat and power (CHP) plant, for example.

In terms of sheer size of turnover, contract energy management (CEM) dominates the industry. CEM - sometimes known as 'third-party financing' - arrived in the UK in its current form in the mid-'80s, having been pioneered in the US at the end of the previous decade. The concept was simple; a contractor goes in to a business and carries out a survey of all its energy requirements, together with an appraisal of the ability of existing plant to meet them. Where savings can be identified by upgrading plant - typically through replacing or modifying existing boiler equipment - the contractor underwrites them and, if required, takes on the entire capital cost of the project work (hence leaving the client with a clear balance sheet). When completed, the contractor operates and maintains the equipment for a fixed term - usually for a minimum of three years - and guarantees the cost at which the client is supplied with heat, steam and power. The cost of the contractor's capital outlay is recovered by taking a cut of the resulting savings and, if these are less than originally claimed, the contractor, not the client, covers the difference.

Previously, companies had operated energy plant for clients on a contract basis - with the emphasis on selling as much heat and power as possible. In this light, CEM's element of shared savings was entirely new. For the client, the attraction was obvious - lower energy bills, fewer staff, protection from any potential volatility in fuel prices and the option of new, externally funded plant and equipment. For the aspiring contractor, the barriers to entry - access to finance, ability to bulk purchase fuel and the long payback period - were often prohibitively high.

Unsurprisingly, then, the first entrants to the British market were wholly owned subsidiaries of the major oil companies: Emstar, then part of Shell UK, and BP Energy, both launched in 1984. At that time, with crude-oil prices at over $30 a barrel, the impetus for industry to make fuel savings was strong. Then, in 1986, oil prices fell. 'The CEM industry was suddenly left wondering what its raison d'etre was,' recalls Simon Lloyd, BP Energy's director of sales and marketing. 'It wasn't until a year or two later that it started to re-identify its role.' That role today, despite a continued period of low oil prices and falling electricity prices, is increasingly defined by the wider growth in contracted-out services. 'Our business is now driven as much, if not more, by business principles to do with outsourcing as it is to do with technical energy issues,' claims Lloyd. Following this logic, Chartham, the Canterbury-based paper maker which is part of the Bowater group, last month opened a six-megawatt (MW) CHP plant designed and built by BP Energy, which will run it on a 10-year contract. Similarly, Zeneca Fine Chemicals has recently commissioned AHS Emstar (now owned by the French utilities giant Generale des Eaux) to run its energy plant and build a new 7.5MW facility at its site Grangemouth.

On the basis of current figures, the market potential for CEM is still huge. BP, for example, estimates that there are around 11,000 medium to large commercial and public sector sites in the UK, with a combined energy bill of over £9 billion. The turnover of the entire CEM industry, however, is currently just over £300 million. 'We're only scratching the surface,' claims Lloyd.

A further boost looks set to come from the public sector, following the recent setting of a target for 15% fuel savings and the relaxation of Treasury rules governing the role of private sector finance. And there is also, of course, the simple environmental argument for using less energy, particularly pertinent in the case of the wider adoption of CHP. By re-using the heat produced from generation, CHP operates at around 85% efficiency, compared with conventional power stations, which generate power at 35% efficiency. To many, the underlying philosophy of turning consumers of inefficiently-generated conventional power into both producers and consumers of highly fuel-efficient power appears increasingly attractive.

Aside from the impetus given to energy management by the desire to reduce costs and divest non-core activities, the increasing complexity of Britain's energy market has focused the attention of many companies on the expanding range of potential suppliers - and the potential savings to be made from shopping around. With the option for users of over 100kW of electricity to buy from sources other than their local electricity company and the replacement of British Gas's monopoly with a market of over 60 independent gas companies, the role of independent energy consultants has steadily grown. Neither are their activities confined solely to power - most will also handle the purchase of water, telecoms and waste-treatment services from their utility providers.

Again, the role of the consultant can vary enormously - from simply providing advice to negotiating price and contract terms on behalf of the client, from purchasing energy in bulk and then selling it on, to advising companies on their individual patterns of consumption. Within these activities the role of fuel selection, energy conservation (using as little as possible) and tariff analysis (paying as little as possible) is critical. Here, the consultant's strength is the access to comparative information. 'Our expertise is designed to cut in when an organisation believes it has already negotiated the best deal that it can and then improve on its efforts,' claims Andrew Johns, director of National Utility Services (NUS). Typically, the analyst will take half of the savings secured - which last year, in NUS's case, amounted to over £35 million.

Apart from the growing complexity of the deregulated marketplace, the analyst's cause is further strengthened by the fact that many utilities quote for services in terms that the untrained eye would find very difficult to compare. 'You can hardly find two suppliers that quote in the same way,' notes Johns. Given their 'no savings, no fee' approach, many companies use consultants purely for security. 'Even if a company has a full-time energy buyer, it will often use us as an insurance policy to ensure that it is doing everything it can,' observes Alan Williams, technical development manager with consultants McKinnon and Clarke. Nevertheless, only 20% of all industrial energy users in the UK call on external advice.

Consultants, however, may take comfort in the virtually limitless market for pinpointing energy savings. In 1986 Peter Walker, the then energy secretary, launched Energy Efficiency Year by setting a target for a reduction in the nation's energy consumption over the next decade of 20%, through 'current cost-effective measures'. Today, as McKinnon and Clarke's Williams points outs, that figure is still 20%. 'Not because people haven't taken steps to save energy,' he explains, 'but because technology has advanced and the opportunity for 20% is still there.' And that, he predicts confidently, will always be the case.

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