Out-Law Analysis 5 min. read

Energy efficiency and energy reduction technologies can offer real opportunities for manufacturers, says expert

FOCUS: Large manufacturers should explore the potential for capturing heat and waste from their industrial processes and using it to power their own operations, local homes and businesses.

The latest energy technologies offer manufacturers the chance to secure their own future energy supply and reduce their reliance on, and costs of, accessing energy from wholesale markets.

Decentralised or on-site energy generation can also open up new revenue opportunities by offering manufacturers the chance to provide neighbouring businesses and communities with electricity, and it also sits neatly with the sustainability agenda and environmental regulations facing businesses.

Manufacturers that are successful in energy management can achieve a competitive advantage. However, it requires sound strategic planning, significant internal resourcing and major capital expenditure, perhaps to the detriment of competing projects.

Experts from Pinsent Masons, the law firm behind Out-Law.com, will be discussing the opportunities for manufacturers to harness energy capture and storage technologies at the Financial Times Future of Manufacturing 2016 event in October.

From an environmental perspective a number of reports have indicated the potential cuts to emissions energy intensive industries can deliver through energy efficiency schemes and use of new technologies, including carbon capture, electricity decarbonisation, biomass, and energy efficiency and heat recovery.

An October 2015 report produced for the Scottish Government, for example, revealed that 8.3 million tonnes of CO2 was emitted by the eight most energy intensive industries in Scotland in 2012, and that this made up 15% of all annual Scottish greenhouse gas emissions. The report said that "progressive grid decarbonisation of 2012 electricity use", together with "continuing investment in ‘incremental’ energy efficiency and heat recovery measures and increased use of biomass" is expected to result in a 27% reduction in those emissions by 2050.

There are already best practice examples in the market. For instance, Diageo harnesses organic waste from their plants and turns it into a source of energy to help power site operations.

Environmental policies have been developed to help drive greater energy efficiency.

The Electricity Demand Reduction pilot initiative, for example, rewarded businesses financially where they reduced their demand for electricity from the national grid at peak times. The pilot enabled organisations to apply for financial incentives to install new energy efficiency measures. The second phase pilot auction was held earlier this year and 24 organisations across the UK were awarded a total of £4.74m for a total of 37 projects to reduce demand for electricity through efficiency schemes at peak times.

Large energy users in the UK are also subject to the CRC Energy Efficiency Scheme, which requires them to "monitor their energy use, and report their energy supplies annually" and buy allowances for every tonne of carbon they emit. The UK government announced in 2016 budget that the CRC energy efficiency scheme will be abolished following the 2018-19 compliance year.

Other initiatives include the Enhanced Capital Allowances (ECA) scheme and Climate Change Agreements (CCAs).

The ECA scheme encourages businesses to invest in qualifying technology with energy-saving or other environmental benefits by allowing them to "write off the total cost of the equipment against their taxable profit as a 100% first-year capital allowance". The CCAs offer businesses in energy intensive industries, including some manufacturers, the chance to reduce the amount they need to pay towards the Climate Change Levy if they "meet government-agreed energy efficiency improvement targets".

The EU Emissions Trading System is a further regulatory scheme that businesses in heavy manufacturing industries must accord to. In the UK, more than 700 UK-based energy intensive installations, including power stations, manufacturing facilities and oil refineries, participate in the EU ETS. The scheme places a limit on the total greenhouse gas emissions businesses subject to the regime can emit and forces companies to either reduce their emissions or buy allowances if they will exceed the cap.

The scheme is an important instrument for the UK in the pursuit of greenhouse gas reduction. The EU ETS was a European-led initiative but to date, the UK government has been a keen driving force behind climate change in Europe so options for the UK to continue to participate in the scheme post Brexit may well form part of the Brexit negotiations although the UK's influence over the next phase and the final carbon allocations may well be diminished.

The UK government is also supportive of smart metering, which is aimed at giving businesses and households greater information about their energy consumption and development of time-of-use tariffs in an effort to reduce the pressure in demand for energy at peak times.

Beyond environmental and regulatory factors, managing energy output and efficiency can help manufacturers reduce their expenditure on energy, often accounts for large proportion of their total costs.

Many manufacturers already invest in the fabric of their buildings in an effort to reduce the costs of lighting and heating. However, manufacturers are increasingly thinking about energy consumption, capture and services on a grander scale.

There has been an increase in focus on efficient distribution of heat, heat networks, trigeneration (cooling, heat and power) and waste heat capture from industrial process. A significant portion of industrial heat usage is in heat-intensive industry, which is often electricity-intensive too. These industries are considered as vital to delivering a greener economy.

Manufacturers can, for example, plug in to district heating schemes to supply heating and hot water services to nearby social housing or other buildings. This offers the potential to make money from energy generated in their facilities that would otherwise be wasted as well as a chance to tackle problems such as fuel poverty in partnership with local authorities, in line with corporate social responsibility objectives.

Some businesses, particularly energy intensive users, might consider decentralised energy schemes as a means of securing their own energy supply, reducing energy costs and as a potential new source of revenue given it can offer the opportunity to offset demand placed on the National Grid at peak hours of the day or through energy service contracts with local businesses and communities.

Decentralised energy is a rapidly-deployable and efficient way to meet demand, whilst improving energy security and sustainability at the same time. Added to this, a growing number of energy technologies such as anaerobic digestion, biomass combined heat and power, solar and wind, now also carry zero or near-zero emissions.

Decentralised energy, however, remains a relatively new and unfamiliar area for many businesses that have not previously considered energy management as a core part of their business. Constraints on capital budgets have also meant that the payback for these projects must compete with other projects across any business.

As the energy system changes, continuing to rely on supply-side solutions alone would be expensive. Therefore new ways of providing flexibility in the energy system are emerging. Businesses that take control of their energy use and generation stand to benefit from the shift towards an energy system that takes greater account of so-called 'demand-side response' (DSR). This is where businesses are paid to alter their demand for power, such as by regulating their use of electricity or tapping into their own on-site energy generation supply, energy storage, or decentralised energy and private wire solutions. For example, storage providers recently made up the majority of successful bidders under National Grid's enhanced frequency response (EFR) tender.

In a recent report the Association for Decentralised Energy said that a significant proportion of UK peak electricity demand could be provided by businesses that flex their demand and make better use of onsite generation. The report recommended a series of changes to allow 'demand-side response' (DSR) to compete more equally in the energy system.

The National Grid is targeting "a step change" in DSR activity by 2020. The National Infrastructure Commission has also recommended that Ofgem, the UK's energy regulation, open a review into the regulations and commercial arrangements surrounding demand flexibility with a view to making participation easier.

The outcome of such a review could help reduce the barriers manufacturers currently face in deploying energy technologies and help them take greater control of their energy consumption and supply.

Kate Turner is an expert in energy service contracts at Pinsent Masons, the law firm behind Out-Law.com. Experts from Pinsent Masons will be discussing the opportunities for manufacturers to harness energy capture and storage technologies at the Financial Times Future of Manufacturing 2016 event in October.

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