Energy management opportunities

The low-carbon economy is likely to have significant financial impacts for all businesses, due to the need to account for existing market externalities such as carbon emissions and adverse environmental impacts. While the UN climate conference in Copenhagen attempted to develop an international approach to mitigating and managing the impacts of climate change, the Australian government has proposed a set of measures as part of its climate mitigation plan, such as the Carbon Pollution Reduction Scheme (CPRS).

Australia recently surpassed the US as the world’s biggest per capita producer of carbon emissions, at 20.5 tonnes annually per capita (Maplecroft 2009). By comparison, India and China emit 1.1 tonnes and 4.5 tonnes per capita, respectively. Unless Australian businesses embrace the opportunities in the low-carbon economy, Australia will fall behind in its capability and capacity to compete and prosper, as demonstrated in an index compiled by Vivid Economics, ranking Australia fifteenth among G20 nations.

Electricity cost ‘externalities’

Currently, costs for consumables such as electricity don’t account for environmental impacts (termed ‘externalities’ in economics) such as climate change. Externalities in a market results in market failure, thus prohibiting more environmentally friendly technologies to be introduced successfully. Since greenhouse gases are responsible for driving climate change, the Australian Government has proposed introducing an emissions trading scheme (ETS) - one of only two market mechanisms - in the attempt to integrate carbon costs into existing consumables. The ETS will attempt to account for such costs through the implementation of an artificial cost for carbon ($/tonne). Companies can then either use their emissions permits or trade them for profit.

Market mechanisms such as an ETS are often preferred when compared to direct regulatory action, as it is fundamentally the failure of economics to include environmental costs adequately. Similar schemes have since been introduced in the European Union (EU) as part of its commitment to the Kyoto Protocol.

Although Australia enjoys one of the lowest electricity costs within the OECD group of nations, at 30-50% lower than some European nations, Australia’s embedded carbon intensity in electricity is among the highest in the world, estimated at 1.325 kg CO²-e per kWh generated in Victoria. Current electricity costs have also been steadily increasing, as detailed in Figure 1.

Figure 1: Historical electricity prices for households and businesses.

One of the key factors in determining how the upcoming ETS will impact energy costs is the understanding of its elasticity (steepness of the demand curve) on the supply/demand curve. Figure 2 illustrates that electricity is relatively inelastic and, therefore, any increase in the cost of electricity will not result in the proportionate decrease in consumption.

Figure 2: Supply and demand curves for electricity.

Figure 3 illustrates the new ETS Electricity Market Price, along with the ETS supply/demand curve. Through the inclusion of the cost of carbon, the demand curve (blue to green) will shift upwards, whereas electricity demand (red), is expected to remain level or, at best, shift to the left very slightly. This is because electricity is a necessary primary good.

Figure 3: Impacted supply curve for electricity with an ETS.

Accounting for environmental costs

With the potential implementation of the Australian ETS, small-medium enterprises (SMEs) must be prepared to manage business risks with rising energy and operational costs. Many opportunities exist for the electrical industry to help its SME clients implement energy management initiatives which may bring environmental and economic benefits in a low-carbon economy.

One of the key issues for SMEs to understand is that electricity is not a fixed operating cost. It is, rather, a resource which can be conserved or used more effectively. Although it’s unlikely that we will see a large increase in the cost of electricity in 2010 or 2011, due to the government’s energy policies to achieve the CPRS targets, it is likely that by 2013 an increase in electricity costs by over 20% will be passed on to consumers. A recent study commissioned by the NSW regulator (Independent Pricing and Regulatory Tribunal) estimated that NSW power bills will increase by 62% by 2013, with a third of this increase attributed to the impacts of the CPRS. Aside from the CPRS, there are a number of factors which affect the cost of energy:

• Supply and demand: Australian demand of electricity has been steadily increasing at ~4% a year and, with limited new generation sources, electricity costs on the competitive market are likely to increase;
• Ageing electricity grid: The majority of Australia’s electricity grid was planned and implemented in the 1950s. With a typical life cycle of 40-60 years, Australia is currently undertaking large infrastructural upgrade projects and, as such, requires large financial backing, which will contribute to the increase in electricity cost;
• Greater electrification and energy switch: One of the key achievements of the 20th century was electrification - and with the average household having more than 70 electronics and electrical appliances, increased electrification of rural towns and consumption of electronics and electrical products will drive up the demand for electricity. Manufacturers have also begun switching energy sources from gas to electricity in recent years, eg, electric cooktops and heaters; and
• Climate change: With many regions of Australia experiencing several consecutive years of drought and the Victorian bushfires of February 2009 attributed to climate change, businesses must be prepared to manage this risk appropriately. A change in the Australian climate is predicted to bring significant variation, such as warmer summers, resulting in the increased use of heating and cooling systems, as demonstrated by the electrical brownout experienced in Melbourne last January, costing Victoria’s economy $100 million.

In the medium term, electricity bills will be dependent on emission credits trading on an ETS, however, further annual increases of 8-15% from 2012 to 2015 would be likely. Using the average median of an 11% annual increase, the price of electricity is expected to reach 33 cents per kWh by 2015 - more than double the price paid in 2007.

SME opportunities

Given the knowledge of energy and climate risks posed to SMEs, business operators must decide to take a proactive approach in risk mitigation - or get left behind. The management of energy as a resource is a key step in mitigating such risks while improving an organisation’s corporate social responsibility. There are various opportunities in which an organisation can attempt to manage its energy consumption:

• Energy audit (AS/NZS 3598:2000): Evaluates the energy consumed on site and assists in determining where energy can be saved, conserved or used more efficiently. This is typically implemented as a first step towards understanding the organisation’s baseline consumption, while implementing cost-effective initiatives within the site.
• Energy management system (EMS): A comprehensive process that assists in the management of all energy assets and helps in the development of objectives and targets for the business. An EMS is typically recommended for larger businesses (often with several buildings).
• Energy and environmental education: Educating staff on energy efficiency and energy conservation may lead to economic and social benefits at a relatively low cost. The development of gentle notices, reminders and standard operating procedures will foster energy awareness and a consistent approach to the operation of energy equipment.

Case study

Graduate House (part of the Graduate Union of the University of Melbourne, providing accommodation for over 120 students), undertook a Level 2 Energy Audit (AS/NZS 3598:2000) to determine opportunities to reduce its energy consumption, which exceeded $90,000 annually.

The building was built in 2005, but only had a 3 Star energy rating, with few energy-efficient appliances. A review of past energy bills helped to illustrate the consumption over a 24-month period, with winter consuming 40% more electricity than summer.

The building consisted of 52 residential rooms, three meeting rooms, a large office area, a bistro/restaurant, bar, large kitchen and other ancillary service rooms.

One of the key benefits seen by the client in undertaking the energy audit was the ability to differentiate between residential and commercial activities through the peak/off-peak meter readings throughout a 24-hour period (Figure 5).

Figure 5: Graduate House electricity consumption.

Figure 4 illustrates the breakdown of energy usage by types consumed within the building - HVAC and lighting were the largest consumers (45% and 25% respectively), electrical equipment (eg, TVs, computers) accounted for 13% while appliances (washing machines, dryers, fridges) accounted for 8%.

Figure 4: Breakdown of electricity usage by applications.

From the audit, FSE recommended 19 sustainability initiatives for the building:

• Four initiatives with an estimated return on investment (ROI) of six months or less;
• One initiative with an ROI of one year or less;
• Five initiatives with an ROI of three years or less; and
• Nine initiatives with an ROI of three years or more.

With over 1000 light fittings within the building, the retrofitting of inefficient lighting systems was crucial in the pursuit of energy efficiency. Graduate House implemented energy-efficiency initiatives in June 2008 and, over the following 10-month period, there has been a significant reduction in the consumption of electricity when compared to the baseline (2007) year. Graduate House experienced a 5.5% reduction in total electricity consumption, translating to a 7% reduction in electricity cost - while maintaining a constant average occupancy level.

Summarising the initiatives undertaken:

• Residential lighting replacement program - replace 278 incandescents (75 W) with 15 W CFLs:
  • - capital cost - $1500;
  • - annual electricity consumption reduced from $7000 to $1408;
  • - ROI - under four months.
• Desk/bedside lighting replacement program - replace 200 GU10 halogen bulbs (50 W) with 11 W CFLs:
  • capital cost - $1800;
  • annual consumption reduced from $1000 to $396;
  • ROI - two years.
• Hallway de-lamping program - de-lamp common hallways and reduce timer switches from five to three minutes (lighting levels were 300% above AS/NZS 1680 indoor lighting standard):
  • annual consumption reduced from $1200 to $612;
  • ROI - under one month.
• Halogen downlight replacement program - replace 140 GU10 halogen bulbs (50 W) with 35 W halogen IRC (emit 30% more light, 80% less heat and last 1000 more hours than traditional halogens).
  • capital cost - $3080;
  • annual consumption reduced from $3000 to $2000;
  • ROI - three years.

Graduate House has since witnessed continued financial savings of over $3500 annually and the reduction of its carbon emissions by over 22 tonnes, with a capital investment of less than $1500. Aside from financial savings derived from such initiatives, Graduate House has also benefited from an improved corporate social responsibility image and behavioural change by its staff and residents in their effort to reduce the building’s overall energy consumption.

Conclusion

Though energy prices will increase in the future, SMEs can manage their energy consumption. Through the implementation of well-informed investments in energy conservation and energy-efficiency initiatives, SMEs can transform themselves into sustainable business leaders while discovering new opportunities within the low carbon economy.

FSE recommends SMEs undertake a long-term strategic plan towards becoming a ‘sustainable business’ - in which energy management initiatives such as energy audits can be implemented and aligned to a suitable timeframe.

Forward Shift Environmental is a Melbourne-based non-profit environmental organisation founded by Kam Ho in 2007 to deliver innovative and cost-effective sustainability solutions to businesses. www.fse.org.au.