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What’s the future for energy in commercial real estate?

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At COP26 today a number of countries have made the commitment to phase out the use of coal and fossil fuels in their energy supplies. We’ve asked Joe Warren, co-founder and director of ZTP which provides green energy supplies to Colliers’ property management clients to share how the energy cost crisis is impacting commercial businesses.


Wholesale energy markets have experienced large volatility in 2021 culminating in the highest prices for power and gas ever seen in the UK. It does not only affect the energy bills of end users but has also caused several energy suppliers to fail (mostly on the domestic side).

The main reason behind the rocketing price is the supply-demand imbalance in the global gas market, because of:

  • The increase in global gas demand due to post-pandemic recovery and more aggressive emission reduction targets as gas is a cleaner fuel than coal.
  • Consecutive cold snaps in early 2021, depleting gas storages worldwide. Currently, European gas storage is 10 per cent lower than the historical average level.
  • Ongoing maintenance of Norwegian gas production assets which had been postponed due to Coronavirus in 2020
  • The reduction in Russian gas flows, especially following the fire incident in Yamal, and political pressure linked to the approval of Nordstream 2. 

In addition electricity flexibility has been impacted by a fire at the electricity interconnector between the UK and France in September.

Energy suppliers are struggling themselves, especially those who have been exposed to the large price increases, without fully hedging, and have guaranteed their customers a fixed price when energy was cheaper. On the domestic side this is causing a large failure rate for suppliers, who are restricted in the price they are able to charge due to the price cap imposed upon them.  In the commercial sector suppliers have a reduced appetite for risk, with some refusing to take on new business from certain sectors, or even refusing to offer a contract renewal.

Blog 04 11 21 energy Kiveev Risk graphs

How are landlords and tenants coping with rising energy costs?

What this means is that tenants and landlords needing to sign a new energy contract now are likely to find that their costs have doubled. Those delaying entering a contract or unable to secure a contract are seeing eye wateringly expensive prices with electricity well over 30p per kWh and gas over 10p per kWh in some cases. 

Colliers’ property management service moved to a flexible purchasing strategy a number of years ago, creating the Colliers’ “basket” to mitigate risk around purchasing electricity and gas. Rather than placing all contracts at a single point in the year, the commodities are traded throughout a set period and locked in at a final point of the contract anniversary to allow for budget security.  The ultimate goal is to avoid price spikes and take advantage of price dips.

The Colliers basket is also green. All our electricity supply is from two windfarms on the east coast. We also offer a “green gas” opt in, however this has a premium price due to the scarcity of supply. During the last 12 months our green energy usage has saved more than 16,000 tonnes CO2e.

A further advantage of the Colliers basket is that those clients with net zero commitments are able to have their own Power Purchase Agreements included within the basket at no extra cost.

A wish list for COP26

Today we’ve already seen promises by a further 18 countries to phase out the use of coal, but without commitments from major players like the US and China the impact will be limited. Also yesterday Ofgem announced that regulators from 90 countries have signed up to working together to speed up the global move to Net Zero.

From within the industry we know there needs to be a move away from natural gas for heating and more renewables available on the grid or directly at site. However in order to achieve this it will mean a need for more localised energy distribution networks and regional pricing, and time of day tariffs. This may involve short term volatility to balance the supply and demand as well as the establishment of more interconnectors between nations.

One of the big moves that would make a significant difference would be enabling hydrogen to be introduced into the gas grid, utilising the infrastructure that’s already there. Government needs to continue to work with the industry to enable commitments on this front sooner rather than later.

 

About the author

Joe Warren is a director at ZTP, a London based energy management and software specialist which supplies Colliers’ property management energy needs. Much of his focus ensuring consistency on sustainability in energy supplies and responding to clients’ needs.

To contact Joe, email joewarren@ztpuk.com