Energy costs in the UK are forecast to rise by 15-20 per cent by 2021, meaning unless fresh produce businesses manage their energy spend effectively, the burden of this additional cost ultimately could reduce turnover; potentially hitting profits and leading to production costs being passed along the supply chain.
PBUK goes into detail with Craig Watson, Business Client Lead at UK energy supplier nPower, about the future energy pricing panorama and how fresh produce buyers and their suppliers can make savings. In preparation for his educational seminar at The London Produce Show and Conference 2018, Watson discusses the solutions available to businesses; from LED lighting, back-up generators and wind turbines, to energy supply contracts, optimising in-store energy usage and staff training.
Q: You work for one of the largest energy providers in the UK. Why is energy a relevant topic for the fresh produce industry at this point in time?
A: All UK businesses are going to be affected by needing to pay more for energy in the next three to five years, and effective procurement – i.e. finding the cheapest contract – isn’t going to be enough to mitigate the new prices.
As it stands currently, by 2021/2022 the wholesale price for energy is expected to rise by 15-20 per cent. So, if you don’t open your eyes, in a year or two you’re going to spend more on your energy and that will have an impact. So, if you don’t operate your business any differently, that extra spend is going to come off your turnover and potentially your profits.
nPower works with a number of fresh produce companies (both producers and retailers) who experience significant energy costs as part of their operational needs. And I believe there are synergies across the industry in terms of the available energy management solutions to help companies manage their energy spend efficiently.
Q: Is this the basis of your seminar presentation at The London Produce Show and Conference 2018?
A: I’m keen to raise awareness of the impact of rising energy prices and where those cost increases are coming from because I want the industry to understand how to mitigate and reduce those costs. I’ll explain the make-up of the energy charges and government costs in the UK, as well as the solutions, usage patterns and ways to contain those costs.
Q: In what ways is nPower working with the fresh produce industry?
A: nPower work with a number of customers within the produce industry. I personally have a strong relationship with one or two fresh produce companies who spend around UK£5 million a year on energy (electricity and gas). They operate a hugely energy-intensive environment with artificial heating and lighting to make sure that regardless of the weather they still have the right surroundings in which to grow.
We’re working with them to analyse more efficient ways of working, e.g. changing the lighting to LED, changing the temperature of cooling equipment to make sure it’s optimised, reducing the amount of times that doors are opened etc. And understanding their time patterns of usage in and around peak energy demand (and charging) times to adapt usage, where possible.
Beyond that, one of these companies also has assets on its site to produce energy to store within a back-up generator. This enables the firm to come off the [energy] grid at periods of high demand (between 4pm and 7pm) when charges are at a peak, and also to export some of their [surplus] energy back to the grid. For those businesses that have this capability it provides quite a strong revenue stream.
Q: Clearly, energy makes up a large proportion of production costs for growers of fresh fruits and vegetables. Why is this an important consideration for the buyers of that produce too?
A: The end-to-end journey is a very important one to understand as there’s a connection from one business to another in the supply chain. If you’re a buyer, you need to understand the impact that energy will have on your suppliers because it could hurt you down the line when suppliers may have to increase their prices and you have to follow suit. It makes absolute sense to raise awareness across the supply chain. If buyers are oblivious to supporting their supply chain, ultimately, it will come back and impact on your business.
Q: What about the direct impact of rising energy prices on retailers and other buying organisations? How can they address their own energy spend?
A: From a business perspective, retailers and other buyers run stores and/or warehouses that incur energy costs. They should take advantage of site audits to optimise their energy usage and efficiency all year round. For example, energy providers can install sub-meters on to refrigeration units, bakery equipment and cooking machines in shops or warehouses to understand which installations are using unnecessary amounts of energy, and the impact of that from a cost perspective.
We can then work on the best solutions to roll-out across their entire estate, such as LED lighting, improvements to air conditioning, plastic covers for the front of chillers to avoid losing lots of energy, and back-up generators. Site audits can also help to understand which installations within store rooms or warehouses don’t need lighting at certain times. Even simply changing 60-watt lighting bulbs to 40-watt bulbs would have a cost benefit.
On top of that, both buyers and their suppliers could look at their cold storage in terms of how long produce is stored to understand whether they could speed up the delivery process and get it out on the road quicker so it doesn’t cost as much to hold and store it. The [energy] market offers a wide range of solutions. It’s not just a case of saving a few pounds, it’s about understanding the customer and what’s right for them.
Q: Evidently, there are various ways to curb energy expenditure. Can you give an unusual example of a successful solution at a produce retail level?
A: Within some retail stores there is quite a universal level of staff from a cultural perspective where not everyone has English as a first language. During one site audit of a retailer’s in-house chilling systems we determined that one of the machines only needed to run between certain hours. But the staff didn’t know that, nor whose responsibility it was to turn it on or off.
So, we created stickers in multiple languages. That way, the chiller didn’t need to be automated. Instead, it was about empowering the staff by educating them to a level where they knew when they should turn on or turn off the chiller. So, something as simple as training meant money saved for the retailer.
Q: You mention that nPower has worked together with suppliers and their buyers. In what ways can buyers support their supply chain?
A: nPower works closely with a major UK supermarket chain and within that supermarket we’ve managed to develop a relationship with their farmers and their supply chain to create an energy contract to minimise costs. The message behind that is if farmers can cut their energy costs it will help the retailer. That message is then pitched at a universal level to all of the retailer’s farmers via their marketing campaigns (magazines, road show etc.) to raise awareness. nPower has a holistic approach to energy, and we can help to create these partnerships because the business model is there.
Q: How does the energy contract work and benefit all parties?
A: As a preferred energy supplier, we can set preferential rates across a portfolio of customers, i.e. a group of farmers or growers. We try to recognise the value of the overall supply chain and we try to create incentives for producers to take advantage of the offer. Also, the energy market today is a lot different than five years ago. Within a contract you can fix some or all energy costs. The more creative you can be, the more you can benefit. There are 11 or 12 separate individual costs that make up an energy price, and each are needed for different things. So it’s about understanding the complexity of those charges and what are the biggest costs. It’s really about appreciating the value of energy costs and understanding when and where you need energy.
Q: So, what is happening with energy prices in the UK. Why are they rising?
A: Ten years ago, 90 per cent of the cost of the energy price related to the production of getting that energy to the end user, i.e. sourcing from coal pits, power stations or gas reserves. Now, that cost relates to closer to 50 per cent of the price because the UK government has introduced a number of new energy cost charges. For example, the energy market reform introduced charges such as Renewable Obligation (RO) in order to invest into research of renewable energy sources such as wind farms.
The government has also introduced costs associated to disaster events because the UK sources a lot of energy from abroad. This means if there is an event that knocks off our supply, the UK can still buy energy from other sources. In addition, there are other new costs related to the UK’s own energy infrastructure, and an agreed level of capacity.
All these different charges are what is pushing up the price of energy. Today, 50% of the energy price is made up of new charges, and those charges are set to increase in the next five years. Also, the way the government is increasing charges within energy is strongly linked to supply and demand, so having the ability to come off the grid at times of peak demand is a strong benefit for businesses.
Q: Are renewable energy solutions the way to go for businesses then?
A: The renewable obligation charge is now worth 20 per cent of the energy bill in its own right, yet it didn’t exist 10 years ago. Cleaner, less polluting and environmentally friendly energy is definitely the way the government and the economy is trying to push the UK.
There is a huge amount of potential here for those growers, farmers and businesses who have the available land or assets by which they can set up systems like wind turbines. As a result, the costs associated with running energy of that nature will become more and more favourable.
You won’t necessarily have cheaper energy costs, but you could use that energy yourself, store it in a back-up generator to use at peak times when demand and prices are high, or sell it back to the grid to offset what you pay. At peak times, this can be quite lucrative. You can also establish contracts [with your energy supplier] to be ‘on stand-by’ to provide your energy supply to the grid when you are required. This can be an extremely lucrative source of income.
Solar panels are another example. Five years ago there was a real buzz around solar; everyone was using government funding to install panel on the roofs of farm buildings or warehouses. That’s changed and there are new topics of interest now, but the key is keeping close to a partner who can work with you on whatever project is best for your business and your supply chain.