Putting the brakes on power consumption.Will UK businesses curb their appetite for energy in time?

Published by:T-Systems21st Floor, Euston Tower286 Euston RoadLondon, NW1 3DPPhone: 0800 036 46 56www.t-systems.co.uk

Written in cooperation with

For more information, please contact us on 0800 036 46 56.Or email: enquiries@t-systems.com

2|3

Content.

4 Foreword

6 About the research

7 Executive summary

9 Introduction

10 Local government ahead of the curve.

12 The UK’s energy outlook.

13 Adressing the challenges.

16 Waste treatment as an energy hedge: Staffordshire’s Four Ashes.

18 Companies believe more nuclear energy is inevitable.

20 Smartening up meters.

22 Conclusion

4|5

Foreword.

Building on our existing solutions for establishing Green ICT, T-Systems has partnered with Intel on the DataCenter 2020 project to research methods for reducing energy consumption. Initial results show that Power Usage Effectiveness (PUE) values can be reduced from 1.9 to 1.3 at existing data centers while future technology breakthroughs will extend this much further. We also have a leading role in GeSI – an international strategic partnership of ICT companies and industry associations committed to creating and promoting technologies that foster environmental and social sustainability.

In this study “Putting the brakes on power consumption”, written in cooperation with the Economist Intelligence Unit, we sought to understand how deep the concerns surrounding energy supply were within the UK’s business and public sector communities. In recognition of the problem, 52 % of respondents cited securing energy supply as the number one priority for the new government in order to ensure a competitive British economy.

In a more risk-aware economy, energy efficiency is set to play a greater role in UK boardrooms. The impact of sharp energy price rises (expected by 81 % of respondents) coupled with the dangers of shortages in electricity supply on operations in the next five years (feared by 47 % of respondents) will need to be constantly assessed. Deployment of advanced technologies will be key to implementing the Smart Energy strategies needed to off-set these risks.

A radical change in energy management needs to be put in place now in order to ensure the UK is not held back in the future. By learning how to put the brakes on power consumption and introduce more energy-efficient processes today we will be able to put the accelerator on economic recovery tomorrow.

Sam KingstonVice President and Managing DirectorT-Systems UK

UK competitiveness hangs in the balance. Emerging from the nadir of the deepest economic crisis in recent history, we look ahead across the next two decades, and see a host of monumental challenges for Britain to overcome: from the strains of managing a swollen public deficit to realising the longed-for benefits of ‘Digital Britain’, competing against the soaring economies of the East and defending the planet against the catastrophic effects of climate change. We face a singularly precarious trading environment that is set to test the mettle of the current generation of industrial and political leaders.

In seeking to understand how best T-Systems can support these leaders, we have focused on an issue that is set to become as fundamental to sustainable business as access to capital. Access to energy and its careful management is becoming a sharp point of concern for British executives in the shadow of a looming energy crisis. Ahead of most other Western European states, the UK is hurtling toward the prospect of energy demand outstripping supply. The fossil fuels that have powered our economy for so long are either running out, are available only from unstable sources, or are simply too environmentally costly for the country to rely on.

While the energy industry itself grapples with the technological challenge of harnessing new sources of energy for stable supply at the volumes required, it is being counter-balanced by a growing responsibility for changing the pattern of demand amongst large energy users. A far closer, more sophisticated relationship between large power consumers and their providers will be needed to underpin security of supply in future.

T-Systems’ understanding and appreciation of the complexities of establishing new methods of Smart Energy management is well-developed. We are part of the Deutsche Telekom Group, whose commitment to becoming an international leader for sustainability is underscored by a range of concrete investments and initiatives. Last year, the Group cut its own CO2 emissions by 90,000 metric tons (a saving of EUR 37 million) in Germany by deactivating older technology in the network that is no longer used to capacity.

As a leader in the provision of information and communications technologies, we are prioritising research and development invest-ments in solutions that will enable Smart Energy. Since 2007, Deutsche Telekom has been working together with the city of Friedrichshafen in Southern Germany, to pilot state of the art technologies that can benefit its 50,000 citizens and businesses in a project known as T-City. Following the successful deployment of smart meters for gas and electricity, the programme is now focused on launching a smart grid trial. Working closely with the local energy provider, Technische Werke Friedrichshafen GmbH, we aim to synchronise fluctuating demand and power supply. Technology is being installed to place “intelligent” links between multiple heat and power plants, a fuel cell facility, around 20 solar panel stations, three hydroelectric plants and approximately 2,500 residential smart meters.

6|7

About the research.

“Putting the brakes on power consumption” is a T-Systems report on energy and efficiency, written in co-operation with the Economist Intelligence Unit. Based on a survey of over 200 businesses conducted during April and May 2010, it explores views on the UK’s energy outlook and energy efficiency efforts within industry today.

A total of 211 senior executives were surveyed, representing a wide range of industries and local government. All respondents had influence over energy policy where they worked. They are also at a senior level, with 49% hailing from the C-suite. One-half of participants come from companies with annual revenues of over £500m. A range of industries were polled, as well as local government. To complement the survey, the Economist Intelligence Unit also conducted a series of in-depth interviews with corporate and public sector leaders across Britain.

Our thanks are due to all survey participants and interviewees for their time and insight.

IntervieweesGraham McWilliam, Director of corporate affairs, SkyJo Fox, Deputy director of The Bigger Picture, SkyJeff Bell, Head of strategy, CentricaNick Bell, CEO, Staffordshire Country CouncilRichard Westoby, Director of energy demand, Scottish and Southern EnergyCor Vrieswijk, Director of operations, easyJetGeorge Martin, Head of sustainable development, Willmott Dixon

Executive summary.

It is easy to forget the wide range of energy sources that play a crucial, often invisible role in powering business and daily life. But a range of forces is making companies take greater notice. First, there is a growing understanding that energy prices are, current recession notwithstanding, heading upwards over the longer term. Second, the bulk of energy today is derived from dirty sources, while consumer and regulatory pressure to clean this up is rising. Third, changes in the UK’s energy mix have not eased concerns about national energy security, especially given a growing reliance on gas. Finally, without careful management, the country’s electricity supply could be outpaced by demand over the coming decade.

Given these pressures, the issue of energy efficiency is increasingly prominent in the British media today. But how much of a concern is it for major consumers: business and the public sector? This report explores the current views and attitudes of British executives on key energy and efficiency issues. Some of the key findings of our research include:

Concern about fuel price increases is the leading driver of energy efficiency efforts.

Worries about security of supply are growing too. Although corporate sustainability remains the second most widespread driver of energy efficiency initiatives, cited by just over one-half (54 %) of survey respondents, seven in ten (71%) point to cost concerns as the primary driver. Strikingly, the vast majority (81%) of executives surveyed for this report expect fuel prices in Britain to rise sharply over the next five years. And supply is also a concern: nearly one-half (47 %) of executives think that their firms may suffer electricity shortages within the next five years. Just one-third, by comparison, have no such concern. This has become such an issue that secure energy supply is the single aspect of the British economy that respondents believe the new government needs to prioritise in order to make the country competitive. Neither supply nor cost fears can be easily dismissed. First, a sizeable propor-tion of the UK’s electricity generating capacity will go offline over the next five years, with a real risk of insufficient new supply coming online to replace it. Second, Ofgem, the energy regulator, believes that energy costs could rise by anything from 14 % to 60 % in real terms.

Many British energy utility firms are changing their business models in response to new customer demand for greater efficiency.

This survey highlights that businesses from all sectors are looking to their energy suppliers to help cut their power needs. Nearly all (91%) respondents agree that suppliers should be required to promote demand reduction through energy efficiency. Many energy companies, however, do not see this efficiency drive as a threat to their business. Rather, in the words of Jeff Bell, head of strategy at Centrica, an energy utility firm, it represents “a paradigm shift”. Business models that incorporate efficiency services as well as the provision of power itself may even be more profitable as they represent new and more valuable opportunities beyond the provision of commodities such as gas and electricity.

!

!

8|9

Business needs consistency across all government policies.

One of the frustrations of several leaders interviewed for this study is the way in which some government policies harm energy efficiency efforts even while others encourage them. To give one example, Cor Vrieswijk, operations director at easyJet, a low-cost airline, estimates that streamlining air traffic management across Europe, including in the UK, could cut his company’s fuel use by up to 10 %. A consistent and integrated approach to policymaking will be important for speeding corporate adoption of energy efficiency.

Smart metering is coming into widespread use, while organisations are looking to micro-generation with interest.

The ability of smart meters to allow detailed assessments of energy usage and, therefore, of where to target efficiency efforts most accurately has made them increasingly commonplace at British companies and public service bodies. About seven out of ten (71%) of organisations polled for this report have either installed them or are in the process of doing so, with the number set to rise to 80% within two years. Meanwhile, micro-generation, usually via renewable sources, such as solar, although an expensive means of generating electricity, is becoming more attractive amid fears of higher prices and uncertain supply. A little more than one in ten (13%) of respondents have such equipment already, but an additional 42% have plans to implement some sort of micro-generation scheme.

Executives see nuclear energy as central to Britain’s energy future.

Seventy-three percent of respondents believe that nuclear energy will have to be the primary solution to the UK’s energy needs in the medium term. Moreover, nuclear is the single fuel that most respondents believe the government should prioritise in the next two years in order to ensure a secure and cost-competitive energy supply over the coming decades (cited by 44%). The Economist Intelligence Unit forecasts, however, that the UK will continue to increase its reliance on gas as a key source of base load energy.

!

!

!

Amid the continuing challenges of a ‘tepid at best’ economic recovery in Britain, energy efficiency might seem like a tangential issue. For business and government, however, it remains very relevant. In order to better understand corporate thinking and action in this area, this report aims to gauge the views of British business leaders today, including those from the public sector. About one-half of executives polled say that energy efficiency is a high-priority item that has actively engaged their organisational leaders. A further 35% say that it has a moderate priority; only 1% claim that it is not on their radar.

Figure 1. How much of a priority is energy efficiency for your organisation’s senior management?

Interest is high in both the public and private sectors. Nick Bell, CEO of Staffordshire County Council, notes that energy efficiency is a big priority for all local authorities, and has been increasing in importance over the last couple of years. Cor Vrieswijk, opera-tions director at easyJet, says that “fuel conservation is at the top of our agenda,” with those in charge given the same status as those running other key elements of the airline’s business, such as flight operations. Similarly, Graham McWilliam, group director of corporate affairs at Sky, a broadcasting company, says energy efficiency is “a very important issue which is very high on the agenda and certainly something that our CEO and board are engaged with. It is an important part of our thinking about the future.”

If anything, interest is becoming greater. The government’s CRC Energy Efficiency Scheme – its flagship, mandatory programme for large public and private organisations that came online at the start of April and will provide financial and reputational incentives to companies to cut carbon emissions – would by itself be enough to focus some executives on the issue. And Richard Westoby, director of energy demand at Scottish and Southern Energy (SSE), an energy utility, says this policy is just one part of a growing trend. “Customers are getting interested in being active about taking control of energy use. There is no shortage of schemes and this is definitely an area for more activity.”

This study looks at the reasons for the accelerating interest in energy efficiency among British companies and public sector bodies, and the implications for the way in which they are addressing the issue in practice.

Introduction.

10|11

Local government ahead of the curve.

More than just green: worries about costs and supply.

Energy efficiency is closely linked in public perceptions to the fight against climate change for good reason. Driving much of UK regulation in the field, for example, has been the government’s commitment to reduce its carbon emissions by 20 % from 1990 levels by 2020. In the business world, meanwhile, reducing output of greenhouse gases is at the core of most sustainability programmes.

Sustainability concerns are definitely not disappearing. The newly elected British government is supporting an increase in the European Union’s 2020 reduction goal to 30%, despite looking unlikely to succeed. This survey also indicates that achieving sustainability goals is the second most common driver of energy efficiency efforts, cited by 54% of respondents, followed by regulatory requirements (46%) that in turn are inspired largely by environmental concerns. Graham McWilliam could speak for many British companies when he says that Sky is committed to building a business that is “sustainable, that has endurable value and growth potential into the future”. He says that energy efficiency and reducing the firm’s carbon footprint is a key part of that commitment. Sustainability, however, is far from the only driver of energy efficiency, or indeed the dominant one. The British government’s renaming of the Carbon Reduction Commitment to the CRC Energy Efficiency Scheme suggests a growing appreciation of the wider number of factors at play. In particular, our survey indicates that cost and long-term energy security are becoming signifi-cant worries for those operating in this country.

Sky-high energy prices were a major concern in the summer of 2008 – July saw the price of a barrel of Brent crude top US$140. The downturn brought relief, but this silver lining to the economic cloud will not last indefinitely. Already, the oil price is well off the 2009 floor of just under US$40, trading between US$70 and US$90 this year. Although oil is not the only fuel, other types of non-renewable energy are following a similar pattern for the same reason: the growing economies of Asia are increasingly competing on world markets for fuel. With recovery under way in these markets – China’s March 2010 imports of petroleum, already the world’s second highest, were up by 29 % from a year earlier – “energy costs”, in the words of Nick Bell of Staffordshire County Council, “are only going to go one way – north.”

Survey respondents concur: 81% believe that fuel prices in Britain are likely to rise sharply over the next five years. As a result, cost considerations are by far the most widespread driver of energy efficiency initiatives, cited by 71% of respondents. This comes as no surprise to companies involved in selling energy. Although customer motivations always vary to some degree, Richard Westoby of SSE finds that “there is still a large group for whom price is king”.

Figure 2. What are the key drivers for energy efficiency initiatives, if any, within your organisation? Select up to three.

Cost concerns are a perennial staple of business. More unsettling is worry over the level of supply. Nick Bell explains that security of supply is an area directly linked to major continuity planning. “It is an issue that we are aware of, particularly in peak demand times in the winter. It is early days, though, and we don’t have any real answers yet.” He is far from alone. Nearly one-half (47 %) of respondents believe that their companies might face a shortage of electricity within the next five years, far higher than the one in three (32 %) who do not expect a shortage. More surprising still, a secure energy supply is by far the single aspect of the British economy to which respondents believe the new government needs to give priority in order to make the country competitive. This is cited by 52 %, nearly twice as often as the next most common choices, infrastructure and price competitive supply (both 26 %). Other traditional business staples are well down the list.

Survey respondents from local government have many similar views to those in the private sector. For example, both believe that a secure energy supply should be the leading priority for the incoming national government in order to ensure a competitive British economy, and both expect the new CRC Energy Efficiency Scheme to be a moderate success overall.

Where they differ is that local government respondents have been more active in introducing technologies that can address energy efficiency and supply. Local authorities across the UK have implemented a swathe of efficiency measures in recent years: switching street lights to low wattage alternatives; improving insulation in council build-ings; installing combined heat and power (CHP) plants; upgrading heating and cool systems; and much more. Using a combination of these actions, the Royal Borough of Kensington and Chelsea Council plans to cut emissions by 40 % by 2014, saving £1.5m a year. Coventry County Council will save about £122,000 a year through changes to street lighting alone.

In our survey, 61 % of local government respondents have already brought in smart metering, and a further 18 % are in the process of doing so. By contrast, the equivalent figures

for the private sector are 49 % and 22 %. Similarly, local government bodies are ahead on micro-generation, ranging from ground source heat pumps and solar thermal to wind turbines and bio-energy: 36 % have already installed such technology, and a further 30 % have plans to do so. Within the private sector, just 8 % of respondents currently have micro-generation up and running, although with 42 % planning to introduce such systems the gap should narrow.

Looking forward, however, local governments may find it difficult to maintain an edge in efficiency technology. When asked about barriers to efficiency initiatives, these respondents are already more likely to point to the cost of capital (48 %) than their private sector counterparts (35 %). With substantial cuts in government spending likely to take place in the coming years, that difference will only increase. Inventive policy, however, can still make a difference in promoting efficiency. As Nick Bell, the CEO of Staffordshire County Council, says of the CRC scheme’s arrangements to reward efficiency and penalise inefficiency, “When we know that the whole UK public sector will have a lot less money because of the national debt, anything that is a potential cost or opportunity is something local authorities will take seriously.”

12|13

Figure 3. Which of the following aspects of the UK’s business environment should the new government most prioritise to ensure a competitive British economy? Select up to two.

This worry is consistent with the Economist Intelligence Unit’s own data, which indicate that there is a definite risk of the UK’s gross domestic electricity consumption exceeding the total generated over the next five years, given that a large proportion of the country’s generation capacity is scheduled to come offline during this time (see section: The UK’s energy outlook). This is not the only voice of concern: in February this year, Ofgem published a report indicating the possibility of blackouts by 2015 and calling for state intervention in the power market1. It estimates that up to £200bn of investment might be required by 2020 alone. Our survey indicates that such warnings are starting to work on business – although nearly one-third of respondents still do not believe them. This is no small result. George Martin, head of sustainable development at Willmott Dixon, a construction company, finds in discussing security of supply “most people’s perception is that electricity and gas just comes ‘out of the wall’ and always will do. They don’t think about where the fossil fuels come from in the first place.”

The UK’s energy outlook.

1 Project Discovery: Options for delivering secure and sustainable energy supplies, Ofgem, February 3rd 2010.

Table 1: UK electricity consumption.

2009 2010 2011 2012 2013 2014 2015

Consumption (gwh)

Industry 111,795 111,787 112,034 111,985 111,945 112,030 112,673

Transport 8,528 8,644 8,769 8,904 9,050 9,204 9,364

Residential 119,701 121,571 123,315 125,032 126,763 128,546 130,278

Commercial & public services 97,279 97,853 98,724 100,112 101,969 103,883 105,614

Other 35,312 35,356 35,486 35,673 35,913 36,191 36,503

Total 372,615 375,211 378,328 381,706 385,640 389,853 394,433

% change, year on year -1.3 0.7 0.8 0.9 1.0 1.1 1.2

Source: Economist Intelligence Unit.

Addressing the challenges.

In dealing with the issues outlined in this report, business, government and energy suppliers will all play a role. Business will continue to improve efficiency, while also adding some additional energy generation capacity as a hedge. In turn, they will look to government for help in mitigating the financial risks of investing in energy efficiency. They will also ask for consistent and integrated regulation. Finally, many energy suppliers will explore major shifts within their business model – supplying new products and services alongside their staple energy products. This section explores some of these shifts underway, looking at companies, government and energy suppliers in turn.

Sustainability, cost and supply issues have focused British executives firmly on energy efficiency. Amid uncertainties, especially about price and supply, the obvious starting point for organisations is “to focus on the things that are in our own control and influ-ence,” explains Graham McWilliam of Sky. Promoting energy efficiency both enhances sustainability and reduces risk. As a result, about nine out of ten respondents say their firm already has a concrete energy efficiency goal for the year ahead, with most planning cuts of up to 10 %. This echoes a recent commitment by the new government, which has promised to cut energy use in central government by 10 % over the coming year (it currently spends about £195m on energy).

After three decades of plenty from North Sea oil and gas, the steady depletion of hydrocarbons and a gradual winding down of the coal industry and coal-fired power generation – about one-third of power-generating capacity is due to be retired by 2015 (mainly old nuclear plants and coal-fired stations) – means that energy imports are on the rise. Policy moves to support the construction of new nuclear-generat-ing facilities, along with increased investment in renewables and carbon capture and storage (CCS), are aimed in large part at capping the rate of import growth. However, replac-ing the UK’s ageing fleet of nuclear power stations with a new generation of reactors will take at least a decade, while CCS is still a long way from being a viable technology. With-out new capacity, electricity demand could start to exceed supply around the time of the next general election in 2015. Most providers seem intent on filling the gap with gas-fired

generation, placing even greater reliance on an already dominant energy source.

Aside from the risks of a potential energy shortfall, two other areas of policy remain unclear. First, a period of cheap energy may soon be coming to an end. New nuclear power stations, wind turbines and CCS technology are costly, so higher bills for domestic consumers appear inevitable, at a time when real incomes are likely to continue to be squeezed by persistently high unemployment and above-target infla-tion. More broadly, the UK‘s vaunted liberalised energy market model is looking increasingly ragged. Addressing future supply and pricing concerns is likely to require a far greater degree of state intervention than in recent decades. It remains to be seen how much control the new government will want to take.

14|15

Economist Intelligence Unit data suggest that much work has already been done, albeit led by a recession-aided slowdown. In the UK, final consumption of electricity fell by an estimated 6.4 % in 2009. Domestic use was down by just 3.2 %, while industrial use dropped by 11%. From 2011 onwards, only sluggish growth in electricity consumption is expected, owing to the subdued economic outlook and the increasing implementation of regulations requiring greater energy efficiency. Services sector demand for electricity is forecast to rise slightly, driven, among other things, by the increased use of information technology (IT), although further falls in energy intensity will ensure only modest growth overall.

Figure 4. To what extent does your organisation plan to reduce its energy demand through greater efficiency over the coming 12 months?

The specifics of efficiency depend on the nature of the company itself. Cor Vrieswijk, for example, points out that, although easyJet tries to keep down power consumption in its land-based operations, as an airline most of its energy use is in the form of aviation fuel. Its actual consumption levels are influenced by almost every department, he notes. For example, on-board inventory levels for retail sales affect plane weight. Accordingly, optimising fuel use involves looking at everything from engine design to behaviour of individual pilots and engineers. If business models define energy challenges, a shift in the model also changes them. Graham McWilliam reports that, as Sky has moved beyond television to provision of telephony and network services in recent years, it has had to learn to be efficient in a much more energy-intensive business.

Whatever the differences between organisations, certain features of energy efficiency programmes are widespread. For 87 % of respondents, a senior executive leads implementation. The important thing is not the details of the arrangement: respondents show little consensus on which executive should have this role. Instead, interviewees believe that it is important for the leadership to remain involved with the issue and send a message that this is the case. easyJet, for example, has a fuel conservation manager who reports directly each week to a company‘s operations director. In other cases, especially as the importance of efficiency grows and regulatory pressures increase, putting responsibility even higher may be appropriate. Willmott Dixon gives responsibility for carbon reduction – and therefore energy efficiency – to the board. Even if ownership of the issue does not reach that high a level, at the very least those who control the budget have to care. As George Martin puts it, “the big energy efficiency issue is often where it features in the hierarchy of the financial director of an organisation”.

Another common element of energy efficiency efforts is the use of advanced measurement technology. The most widespread example is smart metering: 71% of those surveyed have such meters installed or are in the process of installing them. A further 8 % intend to install them over the next two years. Of those with no such plans, 40 % admit that a primary reason is simply a lack of knowledge about the technology (see section: Smartening up meters). Such an approach need not be limited to electricity. Cor Vrieswijk explains that easyJet’s fuel burn monitoring on every flight, combined with data mining software, give it an energy use profile of every plane and engine. The data are used not only to improve results but also to signal the need for mainte-nance. Given that smart meters bring benefits to both energy providers and consumers, their use is likely to grow.

Figure 5. Has your organisation implemented smart metering?

Finally, those surveyed are showing an increasing interest in micro-generation. Already, slightly over one in eight (13 %) have implemented such a scheme and 42 % more plan to do so. Graham McWilliam senses that the direction of travel is that more business and households will generate whatever sources of energy are available. “We are comfortable that this is something we want to invest more in,” he says. “It is not temporary.” Pepsico UK, for example, is moving towards the use of only renewable energy at its facilities, a process that involves considering the possibility of micro-generation at all of its plants. This has led to use of a diverse range of technologies, including a wind turbine at its Walkers Crisps factory in Skelmersdale, an anaerobic digestion plant at the Copella apple juice facility in Boxford to convert waste peels to energy, and a £6m CHP biomass boiler at the Quaker Oats factory in Cupar. The CHP facility will convert waste oat husks into enough heat and energy to power the plant—and also export 1,300 mwh of electricity to the national grid for the first three years.

Currently, however, the economics of micro-generation mean that such efforts are not always the most cost-effective way of reducing carbon emissions. Nick Bell notes that for Staffordshire Council the long payback period of small projects retrofitted onto existing buildings makes them of much less interest that integrating micro-generation into new developments. Moreover, a rush towards micro-generation by so many companies suggests that some are ignoring better routes to efficiency. George Martin explains that Willmott Dixon has found that the imposition of renewable generation requirements on developments has not driven energy effi-ciency in the way it should have done. He argues that before looking at micro-generation options, cutting energy use, in particular through passive measures such as better insulation and air tightness, is a more cost-effective and sustainable approach.

Looking ahead, Richard Westoby of SSE admits that it is hard to tell exactly what impact micro-generation will have on the energy market, but does not expect it to become a major contributor to the grid. Although it does have the potential to grow as customer interest rises, current estimates suggest that just 2 – 3 % of demand by 2020 will be met from micro-generation, owing to the high costs involved. However, as the case study of Staffordshire County Council shows (see next page), the benefits of small-scale generation can go beyond carbon reduction.

16|17

Waste treatment as an energy hedge: Staffordshire’s Four Ashes.

National government.Another key player in promoting energy efficiency is the national government. The survey group as a whole has a positive, if qualified, view of how well it is doing in this area. More than one-half (52 %) think the UK is on the right track in how it approaches efficiency at the national level, although a significant minority (38 %) disagree. Moreover, about two-thirds expect the new CRC Energy Efficiency Scheme to be a success compared with only 11% who foresee failure.

Figure 6. How successful do you believe the government’s recently introduced CRC Energy Efficiency Scheme will be at improving energy efficiency within business?

As noted above, respondents do want the government to focus on energy security and cost competitiveness, but that does not mean that they are looking for active marketplace intervention. Seven in ten of those surveyed believe that energy suppliers, rather than government, should take the lead in developing new sources of supply. Just 13 % feel otherwise, while 47 % call Britain’s market-led energy sector a success compared with 22 % who disagree. Richard Westoby of SSE warns that overly interventionist support for fuels by government carries its own risks. “We are not looking for the government to pick the winners,“ he says. In such a highly complex field, it is best for organisations to focus on their areas of expertise and leave certain tasks either to the market or other bodies. Nick Bell of Staffordshire Council notes that one-size-fits-all solutions typical of national programmes are not always helpful. In terms of encouraging small and medium-sized enterprises to reduce carbon transmissions, for example, “local authorities tend to know business base better and they are often in a position to know what works best in their area.”

Figure 7. To what extent do you agree or disagree with the following?

Instead, survey respondents are looking to central government for help with the financial risks of investing in energy efficiency. This may seem surprising, given that one of the main benefits of such efforts is cost reduction. Nevertheless, insufficient investment capital is the most common concern expressed about implementing new efficiency programmes (cited by 37%), followed by uncertainty about the payback period (29%). As companies and public bodies continue to grapple with reducing consumption, this problem will increase. “Inevitably you eventually get to the point that where you’ve picked the low-hanging fruit,” says Graham McWilliam of Sky, following which significant investment decisions have to be made. Respondents believe that the most effective way for governments to help is through grants and tax credits (cited by 56%), but any funding that improved the likely return on investment in a difficult economic situation will probably have a positive effect. Nick Bell of Staffordshire Council says that one of the reasons why the CRC Energy Efficiency Scheme is very welcome is that it involves real financial penalties and gains.

Figure 8. Which of the following forms of government support do you believe would most incentivise greater energy efficiency nationally? Select up to two.

Equally important in creating the right investment climate, however, is consistent regulation. The problem, according to Richard Westoby of SSE, is not about bad intentions, but rather the complexity of working these things through and what can happen when the rules are adjusted.

Staffordshire County Council is building a new energy from waste facility at Four Ashes Industrial Park near Wolverhampton. The main drivers are environmental and regulatory issues. The county is likely to generate up to 700,000 tonnes of waste annually by 2020 and national taxes on landfill are making that option prohibitively expensive. The council has therefore adopted a zero-landfill policy. Recycling, which is already at over 40 % of waste in the county and is expected to reach 55 % by 2015, will provide only part of the solution.

The Four Ashes project, which cost £600m and will be oper-ational in 2013, will burn 300,000 tonnes of waste annually, roughly one-half from the county and one-half from sur-rounding areas. In the process, it is expected to generate 18 mw of electricity, or enough to power 20,000 homes.

Although primarily a waste management solution, the energy benefits are also an important, if less advertised, consider-ation for the council. Nick Bell, the council‘s CEO, notes

that the issue of rising prices is a crucial one, which would only be made worse should supply issues develop. In the short term, the council is addressing it by a move towards more flexible purchasing, but Nick Bell sees Four Ashes as part of a “longer-term, strategic response“. He explains that the energy the new facility will produce is approximately what it currently uses as an organisation. If the price of elec-tricity that the council needs to purchase goes up, so too will the feed-in tariff it receives for that which it produces. “It will be an internal hedge,” he concludes. Conveniently, it will also be coming on stream during the period that a large proportion of the UK‘s energy supply goes offline.

Small-scale and micro-generation may not be the cheapest way of obtaining electricity, but if included in other projects it can help to address the cost and supply risks foreseen by British executives.

18|19

Cor Vrieswijk of easyJet, like several interviewees, adds that inconsistencies within or between government policies are also hampering corporate efforts to increase energy efficiency. The Air Passenger Duty, which was introduced to generate revenue, is a per passenger tax that penalises efficient airlines with high load factors but exempts cargo planes, private jets and transfer passengers. More broadly, Cor Vrieswijk estimates that if European – including British – airspace were to be managed more efficiently, easyJet would be able to cut fuel consumption by about 10 % and provide a better customer service. “I think govern-ments could do a lot more,” he says. A similar problem is incomplete regulation. George Martin of Willmott Dixon points out that there is still no government definition of zero carbon non-domestic buildings. The shape that definition takes, however, will have an impact on which efficiency strategies are favoured. For example, if a zero carbon building is one where the renewable energy generation is onsite, micro-generation will be favoured, but if allowable solutions include near-site and off-site, then other decen-tralised solutions will be favoured.

Companies believe more nuclear energy is inevitable.

Figure 9. Which of the following energy sources do you believe the UK government should prioritise over the next two years to ensure a secure and cost competitive UK energy supply over the coming decades? Select up to two.

Table 2: Nuclear consumption and supply.

2009 2010 2011 2012 2013 2014 2015

Total no. of reactors 19 19 15 15 15 11 11

Total generating capacity (mw) 10,981 10,981 9,581 9,581 9,581 7,181 7,181

Source: Economist Intelligence Unit.

Energy companies.Also essential to widespread improvements in energy efficiency will be the role of power companies. In considering energy suppliers, survey respondents regard cost and sustainability as nearly of equal importance, with a similar number of respondents saying that the ability to deliver low prices and provide greener energy are key to the supplier relationship (ability to ensure adequate supply at times of peak demand came third). This raises a clear tension that energy suppliers will have to balance: investing in greener (and thus more expensive) sources of energy supply will raise costs, which in turn is a key concern of their clients. Such increases look inevitable, especially as energy suppliers are obliged to invest in greener sources of energy. Ofgem, the energy regulator, has laid out a range of scenarios for the UK’s energy mix between now and 2020. These result in increased energy costs of between 14 % and 25 % by 2020 (from 2009 levels) – with the possibility of increases of up to 60 % in the interim2.

Figure 10. Which of the following issues are most important for you in relation to your current energy supplier(s)? Select up to two.

In grappling with this challenge, leading power companies are seeing new opportunities: by actually helping their customers to consume less energy in the first place. This may seem counterintuitive, but it opens the prospect for energy utilities to start pro-viding new products and services relating to efficiency, beyond just the basic provision of energy itself. Jeff Bell of Centrica thinks a paradigm shift is happening. “The entire market will be moving away from how much gas or electricity we are sending down the line. A warm, well-lit home – that is really the product people are looking to purchase.” Accordingly, his company believes that shifting its business model towards the provision of a range of products and services, targeted at both corporate and domestic users, will more than offset the loss of energy sales. Jeff Bell notes that the firm has the largest group of energy service engineers in the country, a capacity on which it intends to build. It hopes to create the largest insulation firm in Britain through growth and acquisitions, such as that of Hillserve, an insulation specialist, in April 2010; and it has invested in early stage technologies such as combined heat and power (CHP) systems that take waste heat from boilers to generate electricity.

2 Project Discovery, Ofgem, October 2009

In our survey, 73 % of respondents believe that nuclear energy will have to be the primary solution to the UK’s energy needs in the medium term. Moreover, nuclear is the single fuel that most respondents believe the government should prioritise in the next two years in order to ensure a security and cost-competitive energy supply over the coming decades

(cited by 44 %). This is a sharp contrast for the medium-term status quo: current forecasts suggest that the number of nuclear power stations in the UK will decline from 19 currently to just 11 in 2015, before additional capacity is then added (see Table 2).

Executives seem more convinced by the lack of other low carbon energy alternatives than by a poor appreciation of the challenges associated with nuclear power. Most renewable energies, however, are simply not mature enough yet to help replace coal and, as Nick Bell of Staffordshire County Coun-cil points out, even wind farms have their drawbacks, given concerns from local communities about their visual impact.

Nuclear, however, is not a magic bullet, but a necessary part of a portfolio of energies. Richard Westoby of SSE says “we need to maximise indigenous renewables, and pro-mote diversity which includes gas, clean coal, and almost

certainly nuclear.” Similarly, Jeff Bell, head of strategy for Centrica, an energy company, explains that the country needs to be less reliant on coal. “A number of directives are in place that will make that happen,” he says. “We believe there is a strong case for having a significant amount of nuclear in the mix as a source of low carbon baseload, and one that has a high and reliable availability factor to comple-ment wind that does not always blow.” Nevertheless, it will only be part of a bigger picture. Despite the environmental risks associated with nuclear, then, executives have con-cluded that it has a central role in helping Britain to reach its emission reduction targets.

20|21

“There is great opportunity in installation and servicing, as well as in selling electrons” confirms Nick Bell. Importantly, our survey suggests a pent-up demand for such services among UK companies as well as domestic customers. Nearly all (91%) executives polled agree that suppliers should be required to promote demand reduction through energy efficiency. Moreover, about one in four (24%) of companies rank help with energy efficiency or micro-generation as one of the two leading things they look for in a supplier. This represents a substantial base from which to build up such services.

Others agree. Richard Westoby believes that, for SSE, the promotion of efficiency is “certainly not a threat”. In addition to the environmental responsibility of companies in his sector, he sees a wide range of possibilities. These include the installation of heat pumps, photovoltaic cells, and other micro-generation; the creation of a network for electric vehicles; and the provision of services and equipment to customers to help them improve their own efficiency. These developments should bring substantial customer relations benefits and Richard Westoby sees a whole host of opportunities: “The mistake would be not to grasp those with both hands.”

Beyond this, a broader push to reduce carbon emissions, of which energy efficiency is just a part, could in the longer term change the nature of what fuel types are most demanded. For example, if electric cars become more common, demand for oil might drop while demand for electricity rises. As a result, some sustainability efforts might increase sales for some energy companies just as it cuts sales for others. “Electricity demand could be raised by heating, transport and electric cars,” says Richard Westoby. “The pressure will be on electricity to decarbonise, but that would fit with the investments we have been making.”

The current emphasis on energy efficiency is not a threat to energy companies per se, but it is to any that seek to remain simple, undifferentiated commodity providers. British companies and public sector bodies are looking for enough competitively priced, green power to run their businesses. Energy firms that adjust their business models to find different ways of providing this – including by helping organisations to reduce the amount of power they require – will not only thrive, they will have moved upmarket into higher value offerings.

Smartening up meters.

Smart grids, in which communication between power companies and their customers allow complex, real-time adjustments to production levels and price, will be crucial to improving the UK’s energy infrastructure, according to 72 % of survey respondents. Only 3 % disagree. Smart meters are an essential first step along the road towards this vision, but their widespread introduction should not be seen as a sign of its imminent arrival.

Figure 11. Smartgrids will be a crucial part of improving the UK’s energy infrastructure.

According to Richard Westoby of SSE, it is a big step from smart metering to a smart grid. “Currently, smart grid is one of those terms that means all things to all people,” he says. Similarly, from the customer point of view, Jo Fox, deputy director of The Bigger Picture at Sky, explains that the implementation of a smart grid is still so far off, and its shape so uncertain, that companies have not really engaged with the issue yet.

Smart meters, whatever their future potential, are being rolled out for their own benefits, and these are considerable. SSE has trialled them extensively and Richard Westoby reports that their ability to send the company accurate, timely usage information, making estimates unnecessary, is on its own an important customer relations advantage. Jeff Bell of Centrica, which hopes to roll out two million smart meters by 2012 through British Gas, agrees. “From an operational perspective, one of the biggest issues for suppliers is incorrect meter reads, and one of the big drivers of call volume to call centres is customers not understanding the bill based on estimates.”A real-time smart meter takes away these issues, which is a major boon to both energy suppliers and their customers.

The two executives also see increased customer control over energy use as a big plus. Their very presence tends to heighten usage awareness and increase efficiency. Business customers see this as the biggest gain. Jo Fox sees smart meters as “incredibly good in terms of measuring footprint. We have quite a large campus and can figure out which buildings are working well and which are not, so we can tailor our investment.” Nick Bell of Staffordshire County Council, agrees. “We found smart metering quite helpful. Before we put it in we could not have data on utilisation. It showed where we could focus and do things quite quickly.” Data from even more widespread operations can also be helpful in benchmarking. McDonald’s, for example, has used smart metering across all of its UK sites to understand the sometimes substantial variation between energy use among individual restaurants and to help local managers of high usage sites to drive down consumption.

The benefits are not simply those associated with efficiency strategy. Graham McWilliam of Sky explains that making transparent where energy is being used, and by whom, is very motivating from an employee engagement point of view. “You can make it fun,” he says, by encouraging competition over who can do their job more efficiently.

Finally, smart meters can help with more accurate pricing. Canary Wharf Real Estate Services Company has installed smart metering at its namesake property. This has allowed it to allocate energy bills more accurately among tenants and to provide them with detailed reports, permitting them in turn to address their own energy efficiency requirements.

Nevertheless, the introduction of smart meters is still at an early stage. Accordingly, various hurdles remain, including technology standards, a regulatory framework and user education. Willmott Dixon is very positive about the potential of smart meters but has found that actual implementation in its own offices has not always been simple, especially buildings with multiple tenants. “There are also lots of products on the market and lots of challenges in linking between various types of software and hardware,” says George Martin, the company’s head of sustainability. “It has been a very complicated learning experience.”

On the user education front, SSE’s experience suggests that many customers initially have a low level of interest and engagement. “You could quietly deliver smart meters in a cold way and have little effect on behaviour. If you put a whole campaign around it, you should have a much better prospect of giving customers the best value,” Richard Westoby says. Such issues aside, consumers, regulators and energy companies see great promise for the technology.

22|23

Conclusion.

Sustainability, price and security of supply considerations have together put energy efficiency at the top of the agendas of British companies and public sector organisations. In addressing the issue, a variety of actors have a role to play:

All businesses and public sector bodies need to consider how best to improve their own efficiency.

They should prepare for their costs per unit to increase in the medium term as well as for the possibility of insufficient or erratic supply. The latter in particular holds significant implications for companies operating primarily online. Although a well-designed efficiency programme should more than pay for itself in savings, it will require investment in a time of

economic restraint. In considering the level of investment, executives should bear in mind the risks arising from price volatility and potential lack of

supply in future, as well as other benefits. Preparations for addressing the energy efficiency challenge must have a high enough profile within the organisation to ensure

their success, with a structure and organisation that reflects real engagement by senior management. Companies need to consider adoption of the most up-to-date measurement and analysis tools, such as smart meters. As with

any new technology, new uses for such devices will appear rapidly. Executives need to remain abreast of how peers are using smart meters to improve cost structures and even business models. Where appropriate, companies should consider the use of micro-generation. This may not always be a cost-effective way of

generating power, but its possible use as a hedge against high prices, and even insecure supply, should be a factor in invest-ment decisions.

Government should create an atmosphere that encourages efficiency rather than dictating the shape it will take.

Organisations would like financial help with the costs of efficiency, but this may not be possible given the current emphasis on deficit reduction. Policy creativity, such as the CRC Energy Efficiency Scheme’s redistribution of money from those who are energy inefficient to

those who are improving, will become all the more important. Similarly, government needs to strive for greater consistency across all departments so that one set of policies does not discourage

efficiency even while another promotes it.

Finally, energy companies need to seize the opportunities that concern over efficiency provides.

They should become businesses that not only sell power, but which help with its effective use, opening the door to a range of new products and services, from the installation of insulation and micro-generating capacity to efficiency support. Energy companies also need to consider how demand for the different types of energy that they sell will change along with

overall levels of demand. They may also wish to lock in import agreements for the years when UK supply potentially is unlikely to meet demand.

Overall, amid the risks come substantial opportunities. Those companies that do not seize them will have to compete against those that do.

!

!

!

About T-Systems.

T-Systems is the corporate customer arm of Deutsche Telekom AG, one of the world’s leading telecommunications and information technology service companies that offers its customers a full range of products and services for connected life and work.

Leveraging a global infrastructure, T-Systems delivers integrated solutions that help multinational corporations and public institu-tions shape the networked future of business and society. In the energy sector, we enable leading suppliers to transform their operations and adapt to changing market dynamics.

For more information please visit www.t-systems.co.uk

About the Economist Intelligence Unit.

The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of 700 analysts, we continuously assess and forecast political, economic and business conditions in nearly 200 countries. As the world‘s leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.