Green light for change as global fossil fuel prices surge, writes Vicky Cotton, ESG Director, in CoStar.
There’s no escaping the news that global prices for fossil fuels are increasing at record rates. Over the course of the past few weeks there have been periods where the market experienced price hikes over the course of an hour, that were equal to increases over an entire six-month period in 2020.
This rise is unprecedented: wholesale energy prices have risen 212% in the past 12 months, according to energy supplier Octopus. Across the board, landlords and investors are facing extraordinary bills as suppliers push the burden of higher costs further upstream; in some cases even ripping up previously fixed tariff contracts and starting again. Moving forward we are now looking at between 60% and 80% increases in energy budgets for next year.
Almost 40% of the UK’s power still comes from burning gas, as reported by the Digest of UK Energy Statistics (DUKES). Climate impact notwithstanding, the commercial real estate sector’s continued reliance on gas to heat and power its buildings must also be viewed in light of this fluctuating market, the exposure to risk of supply and cost implications.
Real effects of climate change
But now, gas storage is at record lows, with supplies significantly lower than usual due to a combination of factors including global competition, reduction of supply from Russia, increased demand from China, and diminished capacity for storage in the UK. Meanwhile, droughts in China and Brazil have led to lower hydropower generation, meaning there’s more competition for gas in those nations, which is also driving prices up; an ironic twist of fate, with the real effects of climate change driving international demand for fossil fuels.
The carbon price has increased rapidly from €15 / tonne of carbon in March 2020 to €68 / tonne of carbon at today’s value. As this is reflected in energy prices – particularly gas – it has a significant impact on costs.
The price of carbon, which is consumed in the generation of electricity and in the burning of gas, will not be going down anytime soon. If anything, it could yet climb further in order to represent a more accurate cost and to force contribution to the environmental agenda through increased taxation.
Double down on energy reduction
Clearly, the current energy market provides undeniable motivation – if any further motivation is needed – to streamline energy usage and invest in alternative sources of power, in order to mitigate the risk of fluctuating supply and remove reliance on the central UK grid.
To achieve these goals, there is a clear hierarchy of actions to follow. Initially to effectively reduce asset-level consumption, and then in the longer term to develop on-site renewables to replace supply. Typically, in order to identify and then apply these solutions over time, landlords begin with Net Zero analysis and reports, which are then factored into long-term asset management plans to be delivered over a timeline. What the current situation tells us is that these timelines can and need to be significantly shorter, given the pressure of rising energy costs.
This has never mattered more. It is where smart technology, energy audits and phased upgrades of plant and systems to improve efficiency will make a significant impact on reducing the premiums now being charged. As a minimum, reductions of between 15%-25% in energy consumption can usually be achieved through an energy audit and regular system health checks, which form part of Net Zero Asset Plans. Of course, sometimes this can be far higher, and at one 254,000 sq. ft office redevelopment we have identified a 31% reduction in energy demand through improvements to building fabric and M&E plant.
Mitigate exposure to energy market spikes
Payback times for photovoltaics (PV) solar panel installations are expected to fall significantly, according to the International Renewable Energy Agency (IRENA). In less than a decade, the cost of large-scale solar power has fallen by more than 85%, while onshore wind has fallen almost 56% and offshore wind has declined by almost 48% says the IRENA report.
Traditionally PV systems on a commercial asset would have been sized for 80% consumption onsite. Today larger solar power systems can charge a “behind the meter” solar storage battery with excess power, making the case for utilising cleaner energy even stronger with the ability to mitigate exposure to the risks of spikes in the energy market. They also allow management of daily variances in consumption, which will become more prevalent as we move to an all-electric power base across other parts of our lives, including personal transportation.
Cutting costs and mitigating against climate change under investors’ laser-sharp focus on Net Zero are key reasons why more and more businesses are opting for renewable energy, and with carbon costs expected to continue its astronomical rise for the foreseeable future, there has never been a better time to reduce consumption and investigate PV options as part of the wider ESG strategy.
Climate change is a colossal challenge, but if everyone takes action, asset by asset, portfolio by portfolio, we can make a difference.