How can UK businesses prepare for energy transition?

In the UK, we’ve long known that our energy system needs reform, and that businesses and individuals will need to change how they consume energy. But while the case for change is clear, making those changes hasn’t always been a priority, especially for businesses that have struggled through the huge challenges of recent years.

The current surge in energy prices has, however, made energy a topic that is drawing far more attention. And while many businesses will currently be focused on how to get through the short-term problems posed by higher energy costs, rising inflation and the increased cost of living, there’s an interesting picture emerging of how the UK energy system is likely to evolve in the coming years, and what those changes will mean for business.

How the UK energy system could be reshaped

Some idea of what the future of our energy system might look like can be found in two recent publications.

One is the National Grid’s latest edition of its Future Energy Scenarios, which looks at ways in which the UK’s energy system – encompassing producers, suppliers and consumers – could evolve in the years ahead as the country aims to meet its target of net zero carbon emissions by 2050.

The other is the Review of Electricity Market Arrangements (REMA) from the UK government’s Department for Business, Energy and Industrial Strategy. REMA is a broad consultation into how the energy market could be reformed. It proposes fundamental changes that could have a huge impact on how businesses organise and operate.

Possible changes to the energy system

So, with these two publications as our guide, we can begin to map out a few probable shifts in the years ahead:

• Continuing electrification – transport and, potentially, heating will increasingly be run on electricity rather than on different forms of fuel.
• A focus on efficiency – potential further government incentives may drive greater efficiency, but increased energy costs are likely to make efficiency investments more attractive regardless.
• An increase in carbon taxes – in order to drive the transition away from CO₂-producing technology and towards greener alternatives, higher carbon taxes could be introduced.
• Locational pricing – to make better use of our renewable resources, businesses that locate near power generators could potentially pay less.
• Demand-based pricing – to help better link consumption to supply, there could be variations in the price paid for energy, both through the year and through the day.

What changes to the energy system will mean for business

Some of these changes are near certainties, while others represent only possible scenarios. But together they pose some challenging questions for businesses.

How far and how fast to invest in efficiency

With energy costs currently so high, many businesses are already taking basic steps to reduce their energy and heat consumption. And some are going further, considering investments in on-site generation (such as solar panels on rooftops) and energy storage, in improved insulation, and in more efficient machinery.

When it comes to energy efficiency, the high energy costs we are currently seeing are a double-edged sword. On the one hand, bigger energy bills may make it harder for businesses to afford new investments, for example, in more efficient equipment. But on the other hand, any investment that delivers energy savings will pay for itself that much quicker and will generate a bigger long-term return.

It also helps that energy-efficient equipment is 100% tax deductible – giving a potentially sizable first-year benefit.

Driving greater efficiency does not necessarily require a major investment, however. Many businesses are considering offering employees incentives for driving down energy usage – perhaps in the form of a share of the savings, given as a direct payment, a charity contribution, or some other benefit.

Such schemes cost little to set up and can help develop the sense that everyone in the organisation needs to work together and take responsibility for the issue. This collective sense of responsibility may be something organisations are grateful for, if and when, more radical changes are required.

Choosing the right locations

One of the reforms mooted by REMA is locational pricing. This would mean that businesses located near windfarms, for example, could pay less for their electricity. If a sizable difference between prices resulted, it would be likely to influence the investment decisions of many businesses, perhaps even pushing some to relocate.

There is an interesting link with the “levelling-up” agenda here. Parts of Scotland and north-east England are already hubs for the offshore wind industry, and a significant proportion of new offshore wind farms are likely to be located relatively nearby in the North Sea. If these regions can offer lower energy prices, it may help them draw greater investment.

Even without major policy changes, high energy costs may force businesses to take radical decisions when it comes to location strategy. For example, instead of having a high number of regional offices – all requiring power and heating – businesses may instead look to have fewer, bigger and better offices, and to place them in city- and town-centre locations, easily accessible by train, rather than in out-of-town business parks that can only be reached by car.

Such changes can have a big impact on employees. So, businesses will need to plan them long in advance and be able to deliver a joined-up change management and communications strategy that keeps everyone on board.

Using energy at the best times

Another potential reform of the energy markets is the introduction of variable pricing based on demand – with variations possible through the day and through the year.

Producers already face great volatility in the price they are paid for energy – for example, receiving far less during windy nights, when most people are in bed, than on still evenings when everyone is heating and lighting their homes.

Encouraging businesses to shift their energy use to when supply is high and demand is low could help with the shift away from fossil-fuel-based generation. Factories could perhaps carry out energy-intensive processes through the night or at times of the year when energy demand is lower.

This is another area in which organisational change among businesses will be required. There would be a substantial impact on employees, with changes to working patterns and working practices that may have been established over decades.

Following the reform process and anticipating radical change

If the UK is to meet its net zero commitments, businesses will face – and will have to make – major changes. While the specifics can’t be mapped out yet, businesses can – by keeping their eye on publications such as Future Energy Scenarios and REMA – already begin to see ways they need to adapt. And, when radical changes are required, the advantage will lie with those businesses that have a reputation for sustainability and that have planned and prepared for the upheaval ahead.

Published October 2022