Last week some 150 heads of state met in Paris at the United Nations COP21 climate change talks. They arrived with high expectations and promises to act, having been prompted by scientists’ predictions that failure to agree strong measures will doom the world to higher temperatures, deadlier storms, more frequent droughts and rising sea levels.
As the summit opened, the capitals of the world’s two most populous nations, China and India, were blanketed in hazardous, choking smog.
Past climate change talks have proved unsuccessful in trying to achieve a global consensus.
The COP21 talks may well prove to be a turning point in the global response to climate change. The world’s two biggest carbon emitters, the US and China, agreed in 2014 to jointly kick-start a transition away from fossil fuels, each at their own speed and in their own way.
The UK, for its part, became the first major economy to put a date on shutting coal-fired power stations to curb carbon emissions last week when energy and climate change secretary Amber Rudd announced the government’s aim to stop burning coal for electricity by 2025.
It is a welcome commitment, provided that the promised alternatives materialise in time. For some time now, the UK has walked a fine line between supply and demand. In the past decade the removal of old power plants from the grid have not been replaced quickly enough with alternatives.
Rudd’s speech came in the same month that the fragility of Britain’s energy infrastructure was again laid bare. An unexpected outage of power plants on 4 November prompted wholesale electricity prices to soar by over 40 times to £2,500 per MWh, compared with the usual average rate of around £60 per MWh.
This forced National Grid to post its first “notification of inadequate system margin” since 2012, a step that should have caused real estate investors and occupiers to take notice of the impending energy supply crunch. Grid margins were 500MW – the average power needed to supply 400,000 homes – tighter than the system operator would prefer for operational security. As a consequence, heavy users, including businesses, factories and hospitals, were asked to reduce demand or switch to alternative energy sources.
As the warning occurred on a relatively mild autumn day, some 10 weeks ahead of the coldest part of the season, this supply issue is likely to come under close scrutiny during the winter months. National Grid recently warned that it expected the margin of spare capacity to be the lowest in a decade, at 1.2%, or 5% after emergency measures are taken.
At Cushman & Wakefield, we recommend both our occupier and investor clients have a clear energy strategy that seeks the most cost-effective procurement of energy, details the greatest efficiency in use and outlines the management of any risks regarding resilience and security.
In short, we advise clients to purchase energy as cheaply as possible on the best commercial terms. Investors need to ensure buildings are resource efficient with risk management strategies in place for buildings or operations of a critical nature.
Rising energy prices, driven by volatile energy markets and inconsistent energy policy, pose risks to all who consume energy from the grid.
Our three-step energy philosophy is simple: buy energy as cheaply as you can, use as little as possible and, where practical, generate your own.
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Alan Somerville is head of strategic energy and sustainability at Cushman & Wakefield
