The challenge: how to make significant net zero progress and cost reductions during a period of high energy prices
Like many businesses, our client was struggling to cope with the dual forces of volatile energy prices and an ambition to reduce their carbon footprint to meet net zero targets. With an energy budget of over £30m pa, swings in market prices were significantly impacting margins. They had outgrown the broker they had used for many years, which was not capable of serving their ever more complex needs.
Management wanted to improve hedging performance and have more certainty over budgets, for which they needed a better understanding of energy costs and risk management approaches.
To meet their net zero commitments, they recognised that they lacked the knowledge and know-how to develop and execute a successful and affordable plan.
Workstream 1: Price
First, we focused on price and how well they were using hedging techniques both to protect themselves, and to take advantage, of price volatility.
To do this, we looked into the fundamental drivers in the market that were impacting our client. We reviewed their hedging strategy and how it was performing. We assessed how hedging decisions were being made (or in this case, often not being made) – in terms of what metrics were used to quantify risk, how frequently they were assessed, and how this was linked to a view of what was driving the market. We looked at the governance framework that informally existed, but which needed a major revamp. And we worked to understand how advanced the internal knowledge and capability of hedging was.
This process highlighted the areas where gaps in capability existed when compared with organisations that are highly advanced at hedging. The final piece of the jigsaw was to demonstrate how their hedging performance was falling short of what others achieve. By running our advanced hedging model over the previous three years of data, we were able to quantify the missed opportunity.
Presenting our findings to senior management resulted in the green light being given to implement change and establish energy management fitting of the organisation’s scale and ambition. To do this, we implemented an upgraded strategy, governance structure and decision making process, which has enabled a new regime of frequent market insight and discussions. As a result, our client’s finance and energy teams have far greater awareness of the price risk being faced, and have far greater confidence in their own capability to manage it in the way they wish to.
Workstream 2: Net zero
Second, we focused on our client’s net zero ambitions and the plans to achieve this.
Some of the issues they faced:
- Our client was considering many options. Some required significant capital expenditure to implement, with what appeared to be promising pay backs. But our client didn’t have the expertise to assess the options fully, or the toolkit needed to know which capital projects to take forward
- Our client wasn’t factoring in the true economic and environmental costs of fossil fuel energy options into capital investment ROIs
- Not factoring in the true cost of carbon: one project will reduce your carbon footprint more than another. But our client, like most businesses, was excluding the cost of carbon in their capital project assessments. If you do this, you will inevitably allocate your capital to the wrong options and miss golden opportunities to reduce your carbon footprint
- Some sites were performing better than others – often due to poor performing assets or inconsistent processes
- There was an inability to compare self-funded solutions (e.g. solar generation) to PPA approaches (Power Purchase Agreements)
- A lack of ownership at a site level – a feeling that ‘it’s someone else’s problem’
We handheld our client through how to decarbonise the business in a way that achieves far greater returns on their capital allocation.
Within one-year of engaging Flow&Ebb our client is benefiting from some significant gains:
In the second half of 2021, contrary to the high wholesale price of energy, our hedging performance has resulted energy savings meaning £5m of cash has been released from budgets and back to the business. The business is also almost 100% hedged for 2022, at rates far below current market prices.
They have a net zero strategy that is backed up by technical, commercial and market analysis that is allowing them to set ambitious, data-driven targets to reduce their carbon footprint. Capital spend is being targeted at sites with the best returns. And investments are being made with confidence that the predicted financial and carbon benefits will be delivered. As we move into 2022, we are developing programmes in conjunction with their supply base to start to impact their Scope 3 emissions.