How To Reduce Electricity Costs – Part 1

We all know that electricity prices have escalated dramatically over the last couple of years. But did you know that it is possible to offset these increases and even achieve cost reductions in the face of increasing retail prices?

Electricity bills are composed of:

  1. Energy charges (the cost of the electrons that you consume)
  2. Network charges (the cost of the supply infrastructure required to deliver the electrons to you)
  3. Retail supply charges (the cost of the hard work that the retailer puts in to ensure that electrons are delivered to you and a margin to reward them)
  4. Metering charges (the cost of measuring and reporting the amount of electrons that you consume)
  5. Market charges (the cost of the service that the Australian Energy Market Operator AEMO provides to ensure the smooth operation of the market)
  6. Environmental charges (the cost of the mandatory purchase and surrender of both small scale and large-scale renewable energy certificates)

Figure 1 below shows a typical breakdown of a monthly electricity bill for a modest size load (approaching 1 MW) in SA. This end user has a wholesale pool price passthrough arrangement and so the energy charges need to be examined together with the retail supply charges.


Figure 1 – Breakdown of a Typical Electricity Bill By Component


We can see that, in this case, energy charges are 58% of the total cost. If we add retail supply charges, this comes to 62%.

Many businesses believe that the only real method they have to achieve cost reductions is to run a competitive electricity supply tender and then run a tough negotiation with the lowest price offer provider. However, all of the incumbent major retailers are basing their offers on the recent historical performance of the same wholesale market, the same forward market for contracts and their own forward modelling of prices. Their “competitiveness” is largely around nuances with their generation portfolio, their contracted position and their current customer portfolio. But, essentially, there is little difference between the major retailers.

At best, one retailer may be able to put forward an offer that is 5% better than the other retailers. All that hard work in running a competitive tender may deliver a 5% better cost outcome on the 62% of the bill that is competitive. This means that a well-run process may deliver a 3.1% saving over what may have been the case without a well-run competitive process. This is still a good saving over the next best offer, but it may well still result in a cost increase. There are several much more powerful methods to achieve significant real cost reductions.


Figure 2 – Breakdown of Typical Bill By Charge Type


Figure 2 shows the three forms of electricity charge type: energy usage, demand kVA and fixed costs and how they impact the total bill in the previous example. Whilst in Figure 1, 58% of the bill was due to energy charges, Figure 2 shows that actual energy usage drives 90% of the bill. So, the best method of reducing monthly electricity bills is to reduce energy consumption.

With this end user, a very modest 10% improvement in energy efficiency will reduce their electricity bills by 9%, or three times the level of the well-run tender process. This will be approximately the same level of saving for most end users. Energy efficiency is one of the largest levers available to reduce electricity costs.

The cheapest electricity is the electricity that you do not use.

In my book Power Profits – A Comprehensive 9-Step Framework for Reducing Electricity Costs and Boosting Profits I examine some of the common electricity consumption waste that occurs, and how you can identify that waste and reduce or eliminate it to reduce business costs. Below is a brief overview of the Energy Efficiency Step of the framework. More detail is covered in the book.

Everyone can reduce their electricity consumption

Every household and business can reduce its electricity consumption. Most choose not to spend much effort on it.

Energy savings at home

In the simplest example, think of your own home. There are many ways to reduce electricity consumption. Some require investment while others require minimal effort. Everyone knows that you can reduce household electricity consumption by not leaving equipment running that is not required, such as televisions, computers, stereos, air conditioning and heating. But most people don’t pay much attention to switching appliances off.

We also know that we don’t need to chill the air down to 18˚C in summer or warm it to 25˚C in winter. But most people do.

We also know that when we buy appliances we could choose them based on an energy rating and the amount of power that they draw. But many people don’t.

We know that when we walk around the house at night with the lights off we can still see where we are going due to the many little standby lights that are on with all of our appliances, such as televisions and set-top boxes, computers, stereos and microwaves.

We know that we can turn them off at the wall to save on electricity, but most people don’t.

We could even get serious about reducing energy consumption by putting shades over windows to stop the heat radiating into the room in summer, stopping the draft under doors causing additional heating or cooling, not using clothes driers, not running the pool pump as long as we do, changing out fluorescent light bulbs with LED lights, or by replacing our inefficient washing machines, fridges, dishwashers and other appliances with more modern and more efficient items.

We don’t do all of these things because individually they may not cost much money on a daily basis, it’s a bit of a hassle, it’s a bit difficult and inconvenient to switch appliances off at the wall, it’s not the most important issue on our minds, or because the initiatives cost a bit of money upfront.


Energy savings in the business

It’s like that in our businesses, except our employees aren’t paying the bill out of their pocket so the level of attention and care is even lower. So how can we drive electricity consumption savings in the workplace if our employees aren’t really even interested in doing it at home and saving their own money?

The answer is by focusing on it and making it a point of emphasis within the business. The best way to focus on electricity efficiency in the workplace is to engage employees in a team with a clear objective around energy efficiency.


The energy-efficiency audit

The first stage of any energy-efficiency project is to conduct an audit of the current situation. Fortunately, there are many resources on the internet that provide a guide to conducting energy-efficiency audits, and there is also an Australian/New Zealand Standard for Energy Audits AS/NZS 3598:2014.

You may also wish to engage an experienced energy-efficiency auditing consultant to carry out the audit for you. The advantage of this is that they already know the sorts of things they are looking for and can carry out the audit usually more quickly and more thoroughly than if you had to do it with little starting knowledge.

Most auditors will quite heavily utilise resources at the site so that there is very good engagement with employees.

So, what are the opportunities that an audit will identify?


Process efficiency

In a processing facility most of the energy is used in the process, so small improvements in process efficiency can result in large energy savings.

A process runs most efficiently when it’s running continuously with minimal changes and breakdowns. Quite often, operations people understand this and already do have a focus on steady operations and energy consumption per unit of product. However, this measure, while important, is usually subordinated to other important metrics and not given the focus it requires if energy savings are a business objective.

Aside from process stability, some of the other opportunities to improve process efficiency and reduce electricity costs are:

  • insulation to reduce heat loss
  • variable speed drives on fans to replace mechanical dampers
  • variable speed drives on pumps, rather than recirculation or throttling valves
  • correct sizing of process equipment
  • proper maintenance of equipment (such as cleaning of heat exchangers, ensuring minimum pressure drops)
  • proper operation of equipment (such as standardised operating parameters and visual metrics).



While the main process uses the bulk of the electricity, what is commonly underestimated is the amount of energy used in site utilities such as compressed air, heating, cooling, lighting, and cooling towers. And it’s in the utilities area where most of the losses or inefficiencies occur.


Compressed air systems

One of the biggest culprits is compressed air. In some businesses, compressed air can contribute up to 70% of total costs yet the inefficiencies can often be quite large. The US Department of Energy estimates that up to 30% of compressed air production is lost as leakage, and up to 50% is wasted through a combination of leakage, inappropriate use and artificial demand.

Compressed air needs to be viewed as a total system and not just the operation of the compressors. The electricity cost for running compressors is commonly greater than 70% of the total lifecycle costs of the compressor.


Heating, ventilation and air conditioning

The Australian Government estimates that heating, ventilation and air conditioning (HVAC) in non-residential buildings consume approximately 9% of all electricity generated in Australia, and account for 40% to 60% of electricity consumption in those buildings. Yet HVAC systems are generally not well managed and are often plagued with inefficiencies due to inadequate maintenance, poor design and poor control.


Refrigeration and chilling systems

Refrigeration and chilling systems may be significant power users in some businesses. How do you determine if your refrigeration systems are working efficiently? An energy balance can be estimated by determining the theoretical electricity requirement based on design specifications and the volume and products stored, and this can be compared with the actual electricity consumption. The difference is unaccounted for heat gain. This can be quite a detailed and technically challenging operation, but it is very important for a business that uses refrigeration as a major process.

The heat gain can come from things such as:

  • inadequate or broken insulation on pipework
  • air leakage through seals and airlocks
  • too frequent access into the area by employees or customers
  • pumps continuing to run even when the target temperature has been achieved
  • the set point temperature being too low
  • solar gain.

Regular maintenance of the system is required to ensure that all plant and equipment is running per design and nothing has been broken, fouled or bypassed.



Lighting can account for up to 40% of electricity costs in commercial buildings and up to 7% of industrial energy use, and savings of 75% to 90% can be achieved through smart thinking and the use of energy-efficient lighting.

The simplest initiative is to turn lights off when not required. Think about your own industrial site, office building or home. Do you see lights left on during the daytime or in rooms or areas that are not being used? Simply encouraging a culture of turning lights off when not required and automating lights to start up and shut down at night and in the morning can save an appreciable amount of electricity. Installing skylights can reduce the requirement for indoor lighting during the day. And in combination with window glazing, reflective film or shade, windows can be a good source of light in offices during the day.

Similar to other energy-efficiency initiatives, maintenance is important to ensure electricity consumption is kept at a minimum. Over time, many lamps produce less light but draw the same power. Lamps, reflectors and diffusers accumulate dirt, and this reduces light output. Sometimes additional lighting is added as a response, rather than cleaning the fittings.

A lighting survey as part of an energy-efficiency audit can identify areas where the lighting is above standard so that the number of lamps could be reduced. A good lighting survey can also provide advice on whether lighting retrofits and/or upgrades are financially viable.

Upgrading lighting systems, while sounding simple, can be quite complex. There are many retrofit and upgrade options beyond just changing out all lighting for LED lighting.

* * *

The cheapest electricity is the electricity that you do not have to consume. Many efficiencies can be achieved with zero or little cost, while some require a larger capital investment. The efficiency targets that you set will be based on your business’s energy objective and the priorities from your energy audit.

Australia has enjoyed decades of low cost energy and it has been one of our major international competitive advantages. That has now been turned on its head and energy prices have become, at best, “internationalised” and at worst uncompetitive with our major international competitors. Our long period of low costs have allowed us to invest and install energy inefficient equipment and our maintenance practices have not focussed on maintaining energy efficiency.

There is a huge opportunity in Australia to achieve substantial energy cost savings through adopting energy efficient strategy, technology and practices.

About our Guest Author

Michael Williams has 35-years’ experience working in resource based, energy and capital-intensive industries such as iron, steel, ferroalloys, cement, quicklime, mining and waste derived biofuels. His experience in operations general management and knowledge of energy markets has led him to become one of one of Australia’s foremost practitioners in energy strategy and energy cost reduction. In 2018 his book Power Profits – A Comprehensive 9-Step Framework for Reducing Electricity costs and Boosting Profits was published and was widely recognised as essential reading for those interested in how the Australian electricity market works and how to reduce electricity costs.

Michael has a Masters Degree in Applied Finance and Investment, a Bachelor of Engineering in Metallurgical Engineering, a Bachelor of Applied Economics and is a Graduate of the Australian Institute of Company Directors Course. He is a Fellow of the Institute of Quarrying Australia, a Graduate member of the Australian Institute of Company Directors and has memberships of the Australian Institute of Mining & Metallurgy, FINSIA, and the Australian Institute of Energy.

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