Rising energy prices: can the Food & Drink sector weather the storm ?

In March this year, the Office for National Statistics (ONS) reported that food and drink businesses were disproportionately impacted by rising energy costs - 63% reported that they had already been impacted by higher energy costs compared to 38% across all UK sectors.[1]

This is unsurprising when you consider the significant amounts of fossil fuel consumed by the sector at every point in the supply chain – fossil fuel based fertilisers used in the agri-food sector, the multitude of energy intensive manufacturing and processing methods, fuel demand for machinery, transportation and distribution, energy demand in retail for space heating, cooling, refrigeration and cooking, not to mention bars and restaurants – it's been reported that the food industry alone consumes 30% of the world's available energy.[2]

Outlook?

According to the ONS survey, 7% of food and drink businesses were faced with the expiry of their fixed priced electricity in March, and 2% reported the same for fixed gas prices[3] intensifying the existing impact. ING Bank forecasts that energy costs will remain high for the next two years,[4] and it has been reported that food prices could rise by up to 15% this year – an inevitable consequence as the sector struggles to meet rising energy costs. Last month, CF Industries announced that one of its UK fertiliser production plants was closing because of surging gas prices.[5] This will have a detrimental impact not only on the agricultural sector, but as Co2 is produced as a by-product, the impact will also be felt by the brewing and hospitality industries. Whilst CF Industries may have been reported in the media, unreported business closures in the sector continue as rising energy costs become the final straw in a series of challenges faced by the sector in recent years.

A 'green' opportunity?

In recent years there has been increasing pressure on the sector to become more sustainable and achieve net zero status. As the sector strives to reduce its dependency on fossil fuels in order to cut costs and remain profitable, there comes the opportunity to accelerate its plans for net zero.[6] Onsite installation of renewable and low carbon energy such as solar or wind, as well as decarbonised heat through biomass, have the potential to significantly reduce dispatchable heat and power from fossil fuels used in manufacturing and processing plants, warehouses and retail outlets. The impact on costs from this switch is huge, with the added bonus of gaining a competitive edge through being seen to be "green" - an increasing focus for the sector's supply chain. Some businesses may already be mitigating the effect of rising energy costs through simple energy savings, such as increased cleaning and maintenance of equipment, controlling heating, and minimising artificial lighting. However, these energy efficiency savings can be maximised through the deployment of technical solutions designed to improve equipment performance. For example variable speed drives can be used to ensure that motor-driven compressors, pumps and conveyors typically used in food processing deploy the necessary amount of energy required to perform at the right time. The addition of this particular solution can reduce energy use by some equipment by up to 25%.[7]

Cost savings?

Installing onsite generation capability and the implementation of technical energy efficient solutions requires up front capital. With high energy prices set to continue, the degree of cost offset in the short to medium term remains to be seen. However, in the longer term, such investment is key to significantly reducing the sector's dependency on fossil fuels, something that is critical for the sector to weather the energy price storm.