With the oil price rising and driving increasing energy prices by 50% over the last twelve months, is this now the time for businesses to reinvest their capital in a sustainable future?
With the cost of oil above $105 (Brent Crude Price March 2022) and increased political pressure to move away from cheap Russian fuel, experts are now stating that fuel costs are unlikely to decrease during 2022.
From the 1st of April, UK households have been put on full alert, as their electricity price cap is increased by 54%. Unfortunately for businesses, there is no price cap and are they are likely to see rises above 60%.
Gas prices have also increased by over 100% over the last 12 months and are unlikely to reduce through 2022.
Fuel prices at the pump have record increases so far during 2022, with RAC records showing that petrol has risen from £1.06 / litre in May 2020 to £1.67 / litre in March 2022.
Businesses are not just affected by the increased energy costs but also the market fluctuations, causing businesses re-group and continually re-evaluate their margins and budgets.
A majority of SMEs spend over 20% of their overhead on energy consumption according to NatWest. Many of these businesses believe that increased costs in this area impact their growth.
Another incentive for businesses to invest in sustainable solutions over 2022 is to take advantage of the UK’s Super Deduction Tax incentive for Capital Investment for their Capital Investment over the next 12 months, thus allowing businesses to take advantage of an enhanced temporary first-year allowance of 130% for main assets and a 50% first-year allowance for special rates assets until April 2023.
The question that I am asked frequently by colleagues and clients is what can I do to help reduce our costs and remove the fluctuations in the price?
This will depend on the business situation; generally, they should invest in areas they control and do projects that give them the biggest bang for their buck.
Businesses that are in control of their property and fleet have the potential to reinvest in several differing sustainable projects options, which would have both long- and short-term payback that will reduce their costs and reliance on outside forces.
For businesses that sublet, still have the opportunity to invest in sustainability projects. Although, the main criteria here is that the investment pays back within the lease period
The projects to consider include:
- Changing lighting to LED lighting. Lighting makes up around 20 -25% of heating bills, changing to LED lighting can reduce the total cost of lighting by 75 – 90%. LED lighting projects can return investment in as little as 8-months.
- Investment in a building management system (BMS) that can actively control heating, air conditioning and lighting can drastically reduce your energy consumption by 5 -30%. Reducing heating or air conditioning temperatures by 1oC can save as much as 10% of gas consumption. Smart BMS systems can help businesses monitor their energy usage. This is a critical enabler that will help businesses investigate areas of high energy usage to allow prioritisation of future energy reduction projects.
- Electric cars and vans presently give an exceptional return on investment. Comparative data with petrol vehicles reports savings in fuel costs, road taxes and maintenance costs. RAC data in March shows running costs charges for electric were £0.25 to £0.10 per mile (depending on charging off or on-peak charging and the type of vehicle) compared to £0.13 to £0.20 per mile (depending on the engine size). There is no road tax on electric vehicles purchased under £40K and no congestion charge for any electric vehicle. A business may also receive government grants when purchasing electric vans and differing from current perception maintenance costs estimated to be lower as they have fewer running parts. For example, the maintenance service charge for a Volkswagen e-Golf is 20% lower than regular Golf.
- Longer-term projects such as solar PV, have slower payback but reduce reliance on the grid price. These systems have become more efficient and reliable over the last decade. With the cost of solar at £0.10 compared to the grid price of £ 0.28, an average medium business using 45,000 kWhr / year could save over £8000 per year. The estimated payback would be around 6 – 10 years, including CAPEX and maintenance charges. Although, this does not include the CAPEX tax incentive if the project is completed by April 2023 reducing the payback time further.
With the recent COP 26 agreeing to reduce greenhouse warming, the UK government set a current target to reduce carbon emissions by 78% by 2035. Over the next five years, businesses will feel increased government and consumer pressure to reduce their reliance on carbon fuels. Therefore, is this the time that it makes business sense to get ahead of the curve and reinvest in a sustainable future? By investing sensibly in these types of projects, businesses can reduce the risk of energy market fluctuations and still save on their bottom line.
4C Associates recent annual survey of over 200 business leaders and procurement professionals highlighted that over 75% of procurement organisations have a limited approach to sustainability, with only 5% stating that their sustainability approach is fully developed. 70% of the people surveyed see their organisation’s top driver for sustainability as the need to maintain a strong public image, followed closely by the need to comply with regulations. This is irrespective of the size of the organisation or sector. The sharp increases in energy costs may change this focus away from maintaining a good public image to cost and risk management as the key drivers. By investing sensibly in sustainability projects, businesses can reduce the risk of energy market fluctuations, save on their bottom line, and increase their public image.
The study also highlighted that over two-thirds of people surveyed see sustainability as a key issue facing organisations and feel confident enough to pursue this agenda.
If you would like to chat further about any of the ideas mentioned in this blog, please contact me at bruce.kirkwood@4cassociates.com
If you require more information copy of the 4C annual survey or would like broader conversation on the survey, please contact Alison Ford-Langstaff (Partner 4C Associates) at Alison.Ford-Langstaff@4cassociates.com
