Green IT & Green Hosting

Energy - A Risky Business

30/03/10

How exactly is the UK's energy profile shaping up? What picture is UK legislation creating for energy usage and how might the UK's energy profile prejudice business, if energy supply/cost is not treated as a risk? David Leedham offers his insights

I.T. is dependent upon the energy that powers the buildings that envelop and protect it. So, the business operating such IT is subject to the risks of potential power interruption and/or increases in the cost of operation, due to rising energy costs; there may also be reputational - and so share price - risks to consider. Such energy risks need to be evaluated and addressed, particularly where IT is essential to a business and power is a major demand.

When the Department of Energy and Climate Change ran a survey asking participants if they thought climate change would affect them or the next generation, less than 50% thought that it would. Perhaps they should have asked if people had concerns as to the UK's energy supply and energy costs, particularly if, in the midterm, 70% of the UK's energy supply will prove to be dependent upon imported gas?

'The Times' of 7 January 2010 highlighted the impact of bad weather on current UK operations: "The shutdown of a giant gas field offshore of Norway has pushed Britain's gas infrastructure into emergency mode, forcing the closure of industrial companies in the north of England, in order to preserve supplies to homes, shops and offices."

Much attention has focused on climate change and the need to reduce emissions. These issues are along the same trajectory as the need to reduce dependency on external energy supplies and improve self sufficiency, using greener sources. It seems unlikely that nuclear power will be able to solve the short- to medium-term energy issues. Perhaps the more immediate issues for the UK are not emissions reduction to alleviate climate change, but the risks of rising energy costs and supply interruption, due to poor infrastructure or lack of supply?

Does existing and imminent legislation give a steer? December's Copenhagen Conference showed the difficulties the international community has in balancing competing interests, in order to achieve a legally binding consensus on climate change. Instead, it produced a last minute, vaguely worded Accord that was 'noted' by the participating nations.

But the UK strides on, irrespective. In 2008, The Climate Change Act was passed and it has quietly set a direction for an industrial/social revolution in the UK. Moreover, Parliament has taken a leap to put the UK at the forefront of energy and hence carbon emissions reduction - a low carbon economy. In fact, the government sees essential business development opportunities, despite the current economic climate. The Act introduces significant legally binding macro and micro changes to achieve change.

At a macro level, the Act requires the UK to achieve an 80% reduction in emissions by 2050. As required by the Act, in last summer's budget, Alistair Darling set carbon budgets to 2022, explaining that they are to: "give industry the certainty needed to develop and use low-carbon technology, cutting emissions, creating new businesses and jobs."

As part of the UK's trajectory to a low carbon economy, further legislation, as initiated by the Climate Change Act, is targeted for introduction this April. First, there is the Carbon Reduction Commitment Energy Efficiency Scheme (CRC). This is targeted at driving energy consumption (irrespective of source) down amongst the UK's bigger (non-energy intensive) businesses, such as banks, large retailers, as well as public bodies such as local authorities. It is designed to create a squeeze on organisations to reduce their emissions continually through financial and reputational drivers.

Secondly, there are Feed-in-Tariffs (FITs), which are to encourage the uptake of renewable energy systems for localised production by requiring the large energy suppliers to pay fixed high prices to those who have installed their own, qualifying systems. In effect, the cost to the big suppliers of paying for such green energy will be passed back to the general customer base through higher electricity bills. However, it would seem that such supply costs will be more significantly affected by the EU Emissions Trading Scheme, which in 2013 will start to auction allowances for emissions.

But there is then the question of what oil, gas and coal supply - and pricing - will be like in the future.

Thirdly, the Act envisages compulsory carbon reporting for business - a complex subject; though initial guidance as to how this might be done by a company was issued last year. As investors begin to look at and gather a picture of a business's dependency on fossil-fuel based energy, there may begin to emerge a 'pricing in' of the risk of how sustainable that business is going forward into the future; perhaps a future with higher energy costs and a less secure supply.

If national power shortages or materially higher energy costs are a real risk, then property owners and occupiers should consider how to address them operationally, and how they will approach the allocation of cost and risk.

The ideal may be to move to self-supply by installing localised energy generation systems, such as a mixture of heat pumps (based on ground, air or water sources), solar water, Photo-Voltaics, wind or CHP (combined heat and power). However, such solutions may prove to be too costly at present (despite tax breaks, such as enhanced capital allowances, and other financial incentives, such as FITs) and the physical attributes of the location may not be appropriate. But location and future adaptability of a site/building may need to be items to be considered when taking/reviewing/valuing an interest (whether freehold or leasehold) in a property. There are many existing leases with years to run that may not clearly address the energy risks, but may leave the tenant to have to call on its business interruption insurance, if there are supply issues.

Energy as a risk seems likely to become an ever-increasing and significant issue for business. Such risk within a business will be shaped by, and will in turn shape, the business's IT and property interests and demands. And then there is the impact of the business on the environment… all key factors that need to be considered in the days ahead.

© David Leedham, Speechly Bircham LLP
Produced by permission under license from Green IT Magazine

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