Clamping down on energy cash costs

THE ANNOUNCEMENT in July by the UK government that the average domestic fuel bill will rise to 1,000 – or just above 4% of UK average diving light to nearly 400 press articles and a good deal of political debate. A less reported story was the increasing cost to business of the UK’s sustainable energy policy, which the government admits will lead to energy price rises of up to 10% per year.

One of the main issues driving the escalating costs is the increasing dependency of the UK economy on imported energy sources. To address this issue, the forthcoming Energy Reform Act will stimulate more UK energy being produced from local renewable sources, including nuclear energy.

However, it will be a long time before such renewable energy sources come online, which will leave UK businesses facing unpredictable energy costs for the foreseeable future. UK finance professionals will need to factor the unpredictability into their cost projections or, better still, establish processes to mitigate the impact of this unpredictability.

Finance directors need a strategy to help their organisations cope with four major energy issues that are rapidly approaching: a lack of mid-term pricing certainty, rapidly increasing energy costs, higher costs from more stringent compliance reporting, and – on the upside – renewable investment cost-saving opportunities.

The UK’s mix of energy sources leaves UK business increasingly dependent on non-UK providers and therefore very susceptible to the whims of the global energy market. Not only is there a diminishing supply of fossil fuels, there are also increasing demands on what is left, due to the high growth in energy consumption in the BRIC countries.

This is amplified by recent political events, such as the so-called Arab Spring, and economic events, such as fluctuations in the US dollar exchange rate. Purchasing forward energy contracts when prices are volatile is risky. Such unpredictability can make FDs over-cautious and funds that might have been used for investment are set aside to insure against further rises in energy prices.

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