Rising energy costs put pressure on demand for renewables

Nathan Goode applauds the energy saving blueprint from Japan

We asked the 3,500 business leaders who responded to our latest Grant Thornton International Business Report (IBR) a new question in Q4-2013: Do you expect rising energy costs to constrain the growth of business over the next 12 months? More than a third of businesses said yes, making it the second largest concern businesses have for 2014 behind only economic uncertainty.  You can view the full results here but I wanted to explain in more detail what I think this means for the cleantech sector.

In the long-term, renewables have the potential to flatten energy costs for both businesses and consumers. However, in the short-term, renewable energy tends to be expensive and requires government subsidies to make it investible. For example, the UK Government has offered a price of £155 ($250) per megawatt hour for offshore wind energy; around three times the current wholesale price of electricity.

Energy costs account for significant and rising chunks of both household and business outlays. Understandably, consumers and companies are clamouring for lower prices now. But this acts as a major disincentive for governments to take the long term perspective needed to support the move to greener energy sources. In Europe, the EU has recently announced a proposed 40% cut in emissions by 2030, which includes an EU-wide target of 27% renewables, but at the time of writing it was not clear how this would be translated into national targets, potentially giving less willing nations plenty of wriggle room. The EU has also announced a target of 25% energy efficiency, but, significantly, this is described as non-binding, implying that it is harder not to use energy than to find new technologies to generate it. This seems counter-intuitive, to say the least.

The global picture on energy costs is far from uniform. In Japan, where nuclear provided 30% of the electricity supply before the Fukushima disaster, four in five businesses are now worried about the rising cost of energy. By contrast, this is a concern for just one in seven businesses in the United States, where the shale revolution has actually lowered energy costs for many businesses. In Europe, it is telling that businesses in Germany (36%), where the government is phasing out nuclear, are much more concerned with rising energy costs than peers in the UK (22%), where new stations such as Hinkley Point are being commissioned, although politicians in the UK appear to fear the political fallout from rising costs just as much as their German counterparts. Equally interesting are the Nordics: just 4% of businesses in oil and hydro-rich Norway are worried about increased energy costs; while only 12% of businesses in Finland are, which is has no fossil fuel resources but significant amounts of nuclear power, hydro and biomass.

So what’s the answer? Firstly, use less energy. Post-Fukushima, Japan’s government introduced stringent energy conservation measures, including a 15% reduction in energy usage for buildings of a certain size and 30% for large corporates.

The results were impressive and show how relatively simple measures can help reduce energy consumption and therefore lighten the associated cost burden. Slashing funding for renewable energy is a short-term, populist measure which will mean higher costs for businesses and consumers in the long-term. But governments will help the case for renewables by also getting serious about energy efficiency, alongside, of course, a balanced low carbon energy mix, which gets a whole lot harder without nuclear.

Nathan Goode is global leader for energy & cleantech at Grant Thornton.