21 February 2016Insuring Energy Efficiency In The Food And Drink Sector
As the fourth largest industrial consumer of energy in the UK1, the food and drinks sector is becoming increasingly interested in the topic of energy efficiency.
With the UK government’s commitment to improve energy efficiency by 18% before 20202, there is an opportunity for the food and drink industry to reduce consumption and save considerable costs through energy efficiency measures.
The International Energy Agency (IEA) has recently estimated the global energy efficiency market to be worth at least $310bn (£192bn) a year and is predicting that it will continue to grow. Yet due to the technical nature of equipment involved and uncertainty over the effectiveness of energy efficiency programmes, lenders and investors often see such projects as an unfavourable credit risk. Faced with this issue, the insurance industry has been looking at ways to increase the attractiveness of energy efficiency projects.
Energy efficiency technologies
In 2010, the food and drinks industry consumed 37TWh of energy at a cost of £1.26 Billion3, enough to power almost 2 million homes. The energy hungry nature of the sector, particularly where heat and refrigeration are concerned, means that there are significant opportunities to save energy such as:
- Optimisation of refrigeration equipment
- Replacement of lighting with LED installations
- Installation of variable speed drives on motor driven equipment
- Replacement of older boilers with combined heat and power plant
- Capturing and re-use waste heat
- Improving insulation
- Optimising environmental and process controls
- Implementing environmental awareness training for staff
In most cases, maximum results require deployment of a full package of individual initiatives, usually at a substantial investment. However, effective programmes can achieve significant reductions in consumption - in some cases as much as 40%. In addition, the per-kilowatt cost of saving energy can be as little as one-half of that of producing an equivalent amount of energy - a simple comparison that underscores the fundamental attractiveness of energy efficiency measures.
The rise of the ESCO
Whilst improved energy efficiency is a very attractive prospect, companies may not always have the necessary competence internally to deliver energy saving projects. As a result Energy Service Companies (ESCOs) are being set up to deal with this increasing demand.
ESCOs assume responsibility for managing a facility’s energy efficiency, including negotiating better deals with utilities, installing technologies to reduce energy consumption and in many cases guaranteeing a minimum level of savings. Typically, they set up a separate subsidiary, termed a special purpose vehicle (SPV), to run a given project.
The SPV purchases required equipment, delivers services and guarantees performance according to the contract. Some ESCOs have developed solutions tailored specifically for the needs of
the food and drink industry.
The costs associated with energy efficiency projects can be substantial. They can either be funded by the company (and reflected as a draw on the balance sheet) or an external source
of finance can be found.
In the wake of the financial and economic crisis, banks and private equity funds have become uneasy about providing the required loans for energy efficiency projects. They do not necessarily understand the technical aspects of the risk, but see it strictly in terms of credit risk. This is where specialist insurers such as HSB Engineering Insurance, using expert models, can deliver value by presenting a realistic picture of projected performance and inherent risks.
Reducing the risks
HSB’s energy efficiency insurance policy is focused on providing protection for all aspects of an energy efficiency project, ranging from material damage (including equipment breakdown) of the installed systems to business interruption (protecting revenue generated by renewable incentives earned by the project). The final element, which makes this product unique, is asset performance insurance. This covers a shortfall in the expected energy savings if they are not realised. Cover is available for periods of up to 5 years and is subject to a project audit.
Energy efficiency insurance is suitable for both companies executing energy efficiency project to their premises and processes and the energy services companies (ESCOs) delivering those projects. It is also highly attractive to lenders by removing the technical uncertainty from the project. This can result in improved credit worthiness for the project; improving access to funding and potentially lowering interest rates.
With the EU committedor to 20% energy saving by 2020; the implementation of the Energy Act 2011 in 2018; and financial institutions looking to invest in energy efficiency projects; the energy efficiency sector is set to grow substantially. By collaborating with energy operators, investors and innovative insurers the food and drink industry will be well positioned to deliver significant reductions in energy costs and CO2 emissions.
1 Carbon Trust Food and drink processing report 2012
2 DECC Press Notice 2013/034
3 Next Manufacturing Revolution – Food and Beverage Sector Non-Labour Resource Efficiency 2014