Why SmartestEnergy is heading for big growth in 2010

Q. SmartestEnergy has just announced that it is now the largest trader of independently generated electricity in the UK, with over 1500 MW now under management. And you are predicting big growth in 2010 – what is going to drive that growth?

A. Several factors are at work to drive growth in the independent energy market. Firstly, the energy markets have been dominated by high prices and extreme volatility and are likely to remain like that, so many firms are taking a long-term view that building their own energy facilities to provide their needs will keep their costs down without exposing them to market uncertainty. Similarly, these market conditions, coupled with the regulatory and legislative incentives that the Government has brought in, has encouraged more and more people to see energy production as a good business model in itself. As more projects come online we have more project developers to do business with.

Q. Who do you compete with in the energy supply market?

A. In a way we compete with all other energy suppliers but our business model does set us apart. We buy electricity from independent, or non-utility, generators and then sell that to large end users only, not the domestic market. We have power purchase agreements in place with all manner of electricity producers ranging from mini hydro plants to large renewable and combined heat and power (CHP) facilities.

Customers can specify exactly how much renewable content they want – anything up to 100 per cent - and can even specify which projects or geographic location they want to buy from.

Q. You say you are responsible for around 13 per cent of renewable electricity entering the UK grid. Where is that coming from and how much of the total energy you trade is renewable? Where does the rest come from?

A. Our power comes from a wide variety of sources. In terms of renewable, we cover all manner of projects from small mini-hydro plants in Scotland, through to bigger projects like the Kentish Flats wind farm, anaerobic digestion, waste to energy and all points in between. We’ve always been focused on the independent producers and the fastest growth in the independent power producer market has been in the renewable space.

Some of our biggest independent energy producers are in CHP – this usually uses natural gas but captures the heat as well as the electricity so is a much more efficient way of using fossil fuels without losing energy. One of our CHP producers sells the excess electricity to us and exports the heat to keep the water in the local swimming pool warm.

Q. You are owned by Japanese group Marubeni Corporation - what are its long-term plans for the UK market?

A.The long-term ambitions in the UK are to develop the business further downstream – i.e. into smaller business customers – and also look to develop upstream (generation )assets; in essence to become more vertically integrated, which is the model most UK players appear to adopt  (i.e. managing the risks within the whole supply chain).

Q. Clearly you are adding more energy supply to your portfolio, but where is the demand coming from and why?

A. Demand is coming from a variety of areas. Larger volume electricity supply is quite different from the domestic arena. Many corporate customers are looking for more responsive suppliers with better customer service and a broad range of clearly defined products – we fill that gap in a way no others do at present. Also, more business users are wanting renewable supply and not many other suppliers have sufficient volume to deliver that – we can and we can prove the provenance of each unit of power by showing the Renewable Energy Guarantee of Origin (REGO) and other certification to go with it.

Q. Who are your customers?

A. We have a variety of customers on both sides of the business. On the generation  ‘buy’ side, our customers include on-site generators and individual project developers and are seeing a lot of growth from farmers. If you have land available then energy generation could be a very profitable business for you.

On the ‘sell’ side, our customers include consumer facing high street names such as M&S and Arcadia Group, both of which have gone for a 100 per cent renewable supply, along with some less obvious names, such as NCP car parks and a few county councils that have also gone for 100 per cent renewable supply.

Q. Why do you only service the half-hourly metered market and is that likely to change in the near future?

A. We initially took the decision to enter the half-hourly metered market as this was where our existing supply license and accredited processes allowed us to participate with rapid entry. As mentioned earlier, we do have ambitions to develop our business to a wider customer base and this will include entry to the non half-hourly metered business sector in the second half of 2010.

Q. Why do you think so many businesses are turning to you for their energy source?

A. Better customer service, greater flexibility in respect of products and terms and conditions, better prices and people that really do care!

Q. Do you have plans to enter the consumer market?

A. Our current plans are focused on the business to business sector. We currently have no short-term plans to enter the residential sector, however, this should not be discounted longer term, particularly when considering the benefits to consumers and suppliers in the development of the smart metering programme.

Q. You do not currently get your energy supply from micro-generators – is that likely to change when the feed-in tariff comes in?

A. Unlikely due to need for greater volumes in the half-hourly market and current license conditions don’t allow us to service micro generators.

Q. You say that smaller projects have lower financial risk and can start generating power far more quickly than the larger scale power plants – so why isn't more of it happening?

A. There is quite a lot of it happening. We have a large portfolio of independent generators who would come under the 'smaller projects' banner – of a few megawatts or less per project. The main barrier at present is lack of credit in the market – developers need the debt markets opened up to them again. Also, there is long delays with respect to planning and connecting to the distribution network. Government needs to take broader control of the planning process and to engage with distribution networks operators to speed up the connection process.

Q. Do you think the CRC Energy Efficiency Scheme and the issue around double counting is a bad thing for your industry?

A. I think the Government has caused a lot of confusion in the market by not knowing how to operate its own set of rules! The CRC itself wasn’t so bad. But, the idea that companies will be penalised for developing their own energy sources or for buying renewable supply is ludicrous. It kills the market. If we want to encourage renewable development or production – which we do – then we also need to encourage renewable supply or consumption.

The confusion comes over which units they use to measure renewable supply. The only proof that your supply is renewable is the REGO, which comes with it. However, the Government has confused this with the ROC – Renewable Obligation Certificate – and used this as basis of measurement. The two certificates have entirely different purposes. The Government has confused the terms as it knows most people don’t understand and won’t wade through the various definitions.

The real irony is that a lot of energy companies will be allowed to carry on simply buying ROCs without generating any renewable and saying they have met their renewable obligation, while others will be allowed to carry on “double selling” their renewable content with REGOs going to one customer and LECs going to another for same unit of power, while at the same time casting a cloud of suspicion over the whole renewable energy supply market. The whole thing is a shambles. We now have a model which incentives the production of renewable power but not the consumption – somewhat akin to certain agricultural policies of the 1980s!

Q. Are the conditions right for enterprise and small to medium-sized enterprises (SMEs) to enter the energy market?

A. Project developers or energy entrepreneurs, as we call them, are SMEs in their own right. Each one sets up and runs as a business. They should be an important part of our economic recovery plans. They generate good returns and involve a lot of different types of skills and jobs across the economic chain – from finance to engineering to maintenance and consultants – and help solve the pressing problems of recession and energy supply in one go!

Q. Is the Government doing enough to incentivise the independent generated energy market?

A. Yes and No. On the one hand, certain regulatory moves – feed-in tariffs, ROCs, etc - are very welcome to encourage more development and generation. On the other, the CRC discussed above, along with lack of finance is hindering progress with respect to consumption.

Q. How big a contribution do you think it could be making to the UK's energy needs with the right conditions?

A. The independent sector could meet a vast sum of UK energy needs when aggregated together. However, this is never going to happen overnight. We do have to remain realistic about what we can achieve, how and by when.

Q. We hear a lot about offshore wind, but what form of renewable or low carbon energy do you think promises to offer the greatest hope for meeting the UK's energy security needs and carbon emissions targets?

A. I don’t believe in silver bullets. The UK needs a huge variety of energy production sources, that is the greatest way to offer security. If you are reliant on just one source then you are hostage to any problems which may occur within that supply chain. At the moment, wind still offers huge potential for growth, and I think technologies like anaerobic digestion and biomass will improve immensely over the next few years along with other forms of energy from waste.

Q. Why don't you just go 100 per cent renewable?

A. We can’t suddenly do this overnight – we do need to keep the lights on. As I said earlier, we do need to be realistic. The greatest form of energy security is diversity of supply and at the moment that includes some forms of fossil fuel and other non-renewable sources. There simply isn’t the amount of renewable supply available in the UK for us to go 100 per cent renewable and meet our current customer needs plus the growth in customer needs we expect to see. Hopefully there will be one day, but for now we believe that diversity – including lots of renewable along with CHP and other forms of generation – is one of the keys to our strength and longevity.

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Green and Environmental Interviews

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www.smartestenergy.com