The energy times are a changing

There seems to be one truism in the energy market these days: everything is changing – carbon renewables, cost and increasing regulation. This also includes the nature of the relationship between energy retailers and their customers.

Historically, energy retailers procured energy and then sold it to customers. These days, some energy retailers are playing a much more active role in how they provide customers with energy and how customers then use that energy. Customers now want greater involvement from the retailer to support new issues requiring flexibility like embedded generation, renewable assets, fuel switching and managing the compliance position in the various certificated schemes – all which require a more integrated approach to energy procurement.

Australian businesses, particularly in the manufacturing sector are under increasing strain from the high Australian dollar, decreased exports, slow recovery from the GFC, increased international competition, rising energy costs and high labour costs. Rising energy costs are just one of these challenges but nonetheless, they are one area where the customer can reduce the potential impact.

Although some people will disagree, energy has historically been relatively cheap in Australia. In 2008, the cost of energy in the commercial and industrial sector in Australia was cheaper than in Europe and similar to most developed Asian countries in our region (ABARE 2010 – See Figure 1 below).

Figure 1 Selected World Electricity Prices (2008) – ABARE 2010.

The widespread development of both brown and black coal-fired generation and considerable investment in this by governments underpinned the growth of industry in Australia in the post-war period. From the 50s through the 00s, the cost of energy in real terms decreased by almost 50 per cent.  Disappointingly, but partly because of the historically cheap energy prices, Australia has some of the lowest energy productivity in the world. Coupled with this, we have one of the highest carbon intensities and therefore a great exposure internationally to a carbon price. This means there is both a great opportunity for improvement in our energy efficiency and also a strong motivation for it.

Figure 2 Retail energy prices in Australia since the post war boom – Simshauser et al. 2010.

Although it was historically cheap in Australia, that situation is changing. Sources of this increase in energy cost include considerable investment in networks (refer my earlier comment on the transition to smart grids), investment in renewables (both large scale and distributed), increases in the cost of fuels (for both coal and gas), carbon and also investment in new generation. 

What does this all mean for commercial and industrial energy customers?

Commercial and industrial energy customers are well versed that energy cost is a product of the unit price and the volume. Customers (more so their procurement divisions) have long explored how to reduce the first variable (price). Given the nature of the electricity pool, the cost of generation and network costs however, there is a limit to how far this can be reduced.

The other variable that customers have an ability to influence is the volume (i.e. their consumption).  This is where customers should be (and are) starting to increase their focus. This can be done through a number of means including energy efficiency, energy conservation, embedded generation and fuel switching. This reduction is supported by the carrot of reduced energy spend and the stick of increased public reporting of energy efficiency measures implemented (or worse identified measures not implemented).

This focus on ‘volume' is the impetus for the change in the relationship between the customer and the retailer. Energy management as part of procurement imperative is increasing, but with this comes challenges around lack of energy, engineering and project delivery expertise within businesses. There is an increasing demand for new skills and expertise around risk management, trading, accounting, data, project implementation and energy management. In short, these energy management skill sets are not (or have not been to date) core business.

Given the lack of skilled labour in Australia and the lack of a strong culture of energy efficiency, this provides a challenge for customers. This is however, where the opportunity is for a retailer, if they are able to provide these services for their customers. This is a logical fit when these energy management services are coupled with the retailer's ability to offer flexibility around the contracting of energy (i.e. managing daily quantities, provision of PPAs and implementation of demand response), all of which a retailer is naturally positioned, as a market participant to deliver.

The high Australian dollar has made export markets more difficult but conversely, energy efficient imported goods should be more cost effective. When this is considered in the context of increasing costs from networks and a carbon price and with potential subsidies available through various government schemes, this is even more reason for customers to undertake projects that reduce their consumption and energy spend.

But if retailers historically make their money from merely selling energy, why would retailers start doing this? Simple, because their customers are asking for it and they know their customers in the commercial and industrial customer must remain competitive. They will remain competitive through being more efficient. If they are inefficient and as a result, have to reduce production or shut down and move overseas, the retailer has lost their customer and cannot continue to sell energy to them in the future.

This is especially important as the industrial and commercial customer's load is often valued by the retailer to diversify the retailer's portfolio where the balance is often residential customers. The retailer gets the benefit of a long-term partnership where they can sell energy (slightly less) and services to customers today and ensure that the customer is there tomorrow. 

In Australia, AGL Energy Services has been operating this model in Australia for more than 20 years. During that time AGL's Energy Services has delivered projects that include cogeneration (up to 21MW in size), natural gas filling stations for buses, landfill gas generation, energy efficiency upgrades in commercial buildings, energy performance contracts and fuel switching projects (coal and LPG to natural gas) for some of Australia's most well-known companies.

Drivers for customers to undertake projects include increased reliability of supply, decreased carbon exposure, increased efficiency and decreased operating costs. This is not however, limited to Australia, it is also increasingly happening overseas with retailers like British Gas (with their Energy Services business – Energy 360) and also E.On (in the UK).

The retail relationship and procurement of energy are changing for both the retailer and the customer and have the potential to benefit both parties. To achieve the full potential of this change, both parties have to think differently about their energy sale relationship and the part that they play in it.

Dr James Hunt is Manager Advisory & Projects in the Energy Services division at AGL (NSW, ACT & QLD).