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In this final part of the series I combine the uncertainty of gas prices and heating degree days discussed previously to give an indication of the magnitude of the risk associated with a ‘do nothing’ or ‘business as usual’ strategy. Again, I’m not scaremongering, I’m just asking if you can afford to delay in managing your energy in a comprehensive manner or that if you already have an energy management system, are you using it to its full effect?

I’ve taken the extremes from my previous two blogs and combined them to give four scenarios: mild year at lowest unit price increase (5%); harsh year at lowest unit price increase; mild year at highest unit price increase (65%); harsh year at highest unit price increase. I have assumed the cost of gas to be 4 pence per kWh this year and then inflated it in line with the upper and lower bounds of the model presented in part 1 of this series.

These four scenarios are shown in the table below and the values have been rounded to the nearest £1000. At 4 p/kWh the average of the previous two year’s consumption is £141,000. If this was your budget for 2013 and it turned out to be a mild year and the gas prices had only increased by 5% then you could be under budget by £30,000. But if it is a harsh winter and gas prices are at 6.5 p/kWh then your budget could be blown.

Conclusion
Gas prices are more dominant and they probably will increase and as for the weather, who knows? The simple fact is that doing nothing could be costly. Even if your energy consumption remains broadly constant then your energy spend could increase and interestingly, if the weather causes an increase in heating demand then energy spend will increase and so too will your CRC liability (which at £12/ tn CO2e is equivalent to 0.22 p/kWh of gas consumed). 

With an energy management system in place and being used appropriately the risks discussed in this series of blogs could present opportunities to reduce energy costs and if prices increase then so too will the magnitude of the savings – can you afford not to be using an energy management system? 

In my last blog I discussed the impact that domestic gas prices could have on future energy budgets. Another key factor in determining energy usage, particularly for space heating, is the weather or more specifically, the outside temperature. Heating (and cooling) degree days are published and readily available on the internet and can be used to estimate future heating requirements. If the forthcoming year is mild then the heating load could be lower than the previous year, but conversely if there is a long, harsh winter then the heating load could be higher than the previous year. How much higher or lower will be difficult to predict accurately, but analysing previous year’s data will give an indication. 

The pertinent question is whether or not your energy budget is flexible enough to cope with the uncertainty. To illustrate how flexible your budget might need to be, i.e. quantify the risk, I have used some gas consumption data from the Carbon Trust’s guide on degree days and used degree day data for Gatwick, downloaded from www.degreedays.net from August 2009.

I used linear regression to estimate the gas consumption in 2013 based on the average monthly degree days from 2009 and then compared this to the sum of the minimum monthly values and maximum monthly values for the same period. These values are presented in the Figure along with the Carbon Trust data: the model suggests that we should budget for around 3,500 MWh of gas next year. However, the swing attributed to extremes, e.g. a mild year or a harsh winter, is approximately ±20%.

Am I scaremongering here too? Again, not intentionally. My message is concerned about being prepared: a ±20% swing in energy spend might be an acceptable risk when compared to the cost of implementing an energy management system, but on the other hand it might not. You could get more degree day data and go further back to see if there is a downward trend and thus help to narrow the swing interval.

Nevertheless, there will always be some uncertainty – it’s the weather – and that introduces financial risk to the energy budget. If it is to be mitigated then it needs to be managed and that means it needs to be measured, to paraphrase Lord Kelvin. Can you afford not to be measuring and monitoring your gas consumption?

This series of blogs that I have written for Carbon Credentials aims to illustrate how taking stock of your energy consumption and understanding the risk associated with a ‘business as usual’ approach presents a real opportunity to reduce costs; this first post discusses gas prices, the second discusses degree days, and the third combines both to attempt to show the cumulative impact.  

The cost of energy is increasing. So even if your consumption is flat over the next year your energy bill will increase – but by how much? Government releases fuel price data quarterly and analysing the past trends can offer some insight into the future. The key is not to try and forecast too far. I have used regression analysis to estimate what the gas prices might be at the end of 2013. The Figure shows the relative change in domestic gas prices from 2002 until 2012 – prices are based on 1987 data, i.e. 1987 =100, which means that the relative cost of gas was cheaper in 2002 than it was in 1987.

The line labelled Expected Price is the ‘line of best’ for the data which has been forecast forward to the end of 2013 and shows an increasing trend (the index increases from 224 to 291) equivalent to an uplift of 30% inclusive of inflation. The other two curves represent the upper and lower limits of the model and can be interpreted in the following way: we can be 95% sure that the gas price index will be between 235 (a 5% uplift) and 361 (a 65% uplift). The interval is wide for two reasons, firstly that the gas price is volatile (shown by the peaks and troughs) and secondly, because the model, i.e. the line of best fit, is an exponential.

So am I just scaremongering? Not intentionally. My message is to look at the trend rather than the predicted values themselves and the trend for the last 10 years has been an increase in the price of gas. The index almost doubled from Q1 2002 to Q1 2008 and if it continues we could expect see it double again by Q1 2014.

Using an energy management system to get all your energy data into one place and facilitate benchmarking typically reduces the energy spend by around 5%, coupled with proactive engagement and measuring and monitoring strategies this could get to 10%. If the cost of energy is following an exponential trend then so too will the savings. Now I might be wrong about the trend, but can you afford to wait to see if I’m right?

This is an article that I have written for Carbon Credentials and is also published on its website.

 
TUI Travel Plc (First Choice, Thompson, etc.) launched their 3-year sustainability strategy last week and it makes for an interesting read, and indeed was the catalyst for this article. According to the strategy, travel and tourism is the main source of foreign exchange in a third of developing countries but is responsible for only 5% of global CO2e emissions.

Tourism in some way helps redistribute wealth from richer nations to poorer ones and the aviation industry acts as a conduit in the process. Revenue received from tourists helps (hopefully) to improve the economy of the nation being visited and should eventually improve social elements such as education, healthcare, etc.

However, these benefits come at a price: environmental pollution caused by the tourists. The most significant probably being carbon emissions from aviation, which presents a dilemma. On the one hand tourism should be actively encouraged and promoted to help improve the economies of poorer states and nations, but on the other hand it should be discouraged to combat climate change.

The mantra of the Bruntland Report, which has been embraced by the TUI Travel Plc strategy, is central to managing this dilemma: do more with less. And from January this year, that is precisely what the aviation industry will have to do as a result of its inclusion in the European Union Emissions Trading Scheme (EU-ETS). The industry’s recent growth rate has considerably increased its carbon footprint and its projected growth has been cited as one of the reasons for its inclusion.  For example, Government’s perhaps rather ambitious expectation is that the industry’s contribution to total UK emissions will rise from 9% in 2005 to 29% in 2050.

The cost of the EU-ETS to passengers is estimated to be negligible in comparison to the total ticket price (circa €9 or £8) but is likely to increase as the scheme progresses[1] – this cost arises from airlines having to purchase allowances for the carbon they emit throughout the year. But if airline companies adopt the same strategy as TUI Travel Plc and seek to reduce their aviation emissions by 6% over the next 3 years then this cost should be stabilised if not reduced.

Despite the objections of some non-EU based firms, it appears that including the aviation industry in the EU-ETS could help drive sustainable tourism. But it will require more firms like TUI Travel Plc to tackle the dilemma head-on by embedding sustainability into their corporate DNA and moving beyond compliance.



[1] EU ETS and Aviation, SN05533, House of Commons Library, www.parliament.uk/briefing-papers/SN05533.pdf