Electric shock

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Well, what a couple of months it’s been. In Fish Farmer’s September issue, we looked at the Russo-Ukrainian War in Europe raging on, and food and fuel costs rocketing up.

In just a few weeks, Britain got a new Prime Minister and Cabinet, lost one monarch and gained another, then another Prime Minister, and amongst all that the UK Government promised billions for households and businesses struggling with spiralling energy prices.

How are rising energy costs playing out for fish farming, and will the government support help the industry to weather this storm? Are farmers able to take practical steps to reduce their energy consumption? We also look at how energy costs are impacting aquaculture elsewhere in Europe and further afield.

It was looking a little bleak for the coming winter. Rabobank’s Global Aquaculture update in July, ominously titled On the brink of recession, stated: “Weaker seafood demand is expected in the second half of 2022 compared to both the second half of 2021 and first half of 2022.”

“With softening demand, price corrections, and persistently high production costs, salmon and shrimp farmer profits are likely to decline from recent highs,” reported Gorjan Nikolik, senior analyst in Rabobank’s seafood division.

Norwegian equipment and technology group Akva announced decreased earnings in the second quarter, as a perfect storm of increased freight rates, high energy prices and increased price levels struck the company’s operations.

At the beginning of August, aquaculture technology business Akva Group issued a statement warning shareholders that it was about to sink into the red. Earnings for the quarter fell from NOK 16m (£1.3m) last year to negative NOK 41m (-£3.4m).

The group said the significant shortfall in EBIT was caused by high inflation rates and supply chain restrictions driven by the Russia-Ukraine conflict, which added an estimated NOK 37m (£3.1m) in additional costs.

Dire warnings, and desperate pleas for help, followed from the Scottish seafood industry. “As with other sectors, week after week energy costs, particularly for gas, in the Scottish seafood processing sector are escalating,” said the CEO of the Scottish Seafood Association, Jimmy Buchan.

He continued: “As businesses try to cope with ever-changing prices, it is of great concern that some energy suppliers are unable to give quotes on tariffs for next year. This cannot continue or jobs will be lost, and food affordability and our country’s food security will be severely impacted, leading to us becoming increasingly reliant on foreign countries for our food.

“The cost of energy needs to be capped at the current level to give business some clarity and certainty over pricing in the medium term.”

Fixing the costs

For some fish farmers in Scotland, planning ahead has helped to mitigate the risks. A Scottish Sea Farms spokesperson explained: “We (very fortunately) signed a three-year contract last October (2021) capping our exposure to any price increases at 5%.”

What parts of the salmon farming process use the most energy? The Scottish Sea Farms spokesperson said: “At first glance, our new RAS [recirculating aquaculture system] hatchery at Barcaldine would appear to consume the most electricity.

“However, when you consider that it produces the equivalent number of smolts as multiple traditional hatcheries, it equates to a substantial saving in power consumption overall. Similarly, when you add up the combined generation of electricity from diesel generators out on farms, it equates to a consumption greater than Barcaldine. Thereafter, our processing facilities would have the next highest consumption.”

What practical steps can they take to reduce energy consumption? The fish farmer listed several options: “Efficient use of diesel generators to minimise running time. Further reducing the running time of diesel generators via hybrid systems/battery technology. Connecting farms wherever possible to mains supply. Trialling renewable energies – wave, wind, solar, tidal and hydro – with the longer-term goal of transitioning away from diesel generators wherever possible.”

In September the UK Government, led by the then newly-appointed Prime Minister Liz Truss, answered the growing calls for support. On 8 September, just hours before the Queen’s death was announced, ministers introduced a £150bn plan to help households in Great Britain with their soaring bills for two years.

Under the Energy Price Guarantee, a typical household will pay on average £2,500 a year on their energy bill for the next two years from1 October. The scheme limits the price suppliers can charge customers for units of gas and electricity. It is expected to save the average household £1,000 a year based on current energy prices from October. It also comes on top of a £400 energy bill discount for all households. Together, these measures will bring costs close to where the energy price cap currently stands, the government said.

Two weeks later on 21 September, two days after the Queen’s funeral and the end of a national period of mourning, the government announced another huge support package, where energy bills for UK businesses, charities and public sector organisations will be cut by around half their predicted level this winter.

The Energy Bill Relief Scheme will fix wholesale gas and electricity prices for firms for six months from 1 October – although after the disastrous reception given to the “mini-Budget” in September, Jeremy Hunt – hastily installed as Chancellor of the Exchequer – said that the scheme in its published form would only go for six months and woukld need to be reviewed.

Industry groups have welcomed the package, but warned further support may be needed after the winter.

“As with the Energy Price Guarantee for households,” ministers declared in a joint statement, “customers do not need to take action or apply to the Energy Bill Relief Scheme to access the support. Support (in the form of a p/kWh discount) will automatically be applied to bills.

“To administer support, the government has set a Supported Wholesale Price – expected to be £211 per MWh for electricity and £75 per MWh for gas, less than half the wholesale prices anticipated this winter – which is a discounted price per unit of gas and electricity. This is equivalent to the wholesale element of the Energy Price Guarantee for households. The level of price reduction for each business will vary depending on their contract type and circumstances.

“We will publish a review into the operation of the scheme in three months to inform decisions on future support after March 2023.”

Cautious optimism from industry

Welcoming the scheme, the CEO of the trade body UKHospitality, Kate Nicholls, said: “This intervention is unprecedented and it is extremely welcome that government has listened to hospitality businesses facing an uncertain winter. We particularly welcome its inclusiveness – from the smallest companies to the largest – all of which combine to provide a huge number of jobs, which are now much more secure. The government has recognised the vulnerability of hospitality as a sector, and we will continue to work with the government, to ensure that there is no cliff edge when these measures fall away.”

The Food and Drink Federation CEO, Karen Betts, added: “We welcome the scope of the government’s Energy Bill Relief Scheme and the speed with which it’s being rolled out. It addresses the largest and most volatile cost pressure facing our industry right now. Although some aspects of the scheme are still to be clarified, it offers relief to food and drink manufacturers across the UK.”

Seafood Scotland also welcomed the intervention. Its Head of Trade Marketing for the UK, Americas and New Markets, Adam Wing,  said: “The Government’s announcement on capping business energy bills, while expected, is welcome and will provide temporary relief to seafood processors.

“The Scottish Seafood Association has shared its concerns on behalf of many Scottish processors and we will continue to speak to others to ingather as much insight as possible. Energy for processing is a key concern, as is the considerable energy required for freezing, and ensuring that a consistent cold chain is maintained during transportation and distribution.

“We are aware of discussions around attempting to claim relief under UK government schemes for energy-intensive industries. Seafood processing would, in our view, fall into this category, but whether this idea will gain traction in light of the above announcement is not yet clear.”

Adam Wing, Seafood Scotland

The global view

How are rising energy prices impacting the aquaculture industry elsewhere in the world? Reports say the land-based fish farm boom is grinding to a halt, as soaring energy costs and financing challenges inhibit growth ambitions.

While recirculating aquaculture systems (RAS) are often highlighted as environmentally friendly, they are very energy-intensive: water must be pumped, tempered and cleaned on a large scale, to simulate what happens at sea. A rule of thumb is that between six and eight kWh are used per kilogram of fish produced in a RAS plant, according to Bjørn Inge Staalesen, managing director of Ecofisk.

Sky-high electricity prices in southern Norway, Great Britain and the EU place clear limits on the eagerness to finance more land-based facilities. iLaks/SalmonBusiness said it identified 117 different market players working to realise land-based food fish farms. In total, these have a theoretical production capacity of just under 2.7m tonnes.

“According to Rabobank, financing is the major bottleneck for these,” it reported. “Not everyone will be able to get access to capital. And it has not become easier to get money in the last year and a half.

An example is Kvidul, which cancelled an issue of NOK 700m (£58.4m) through Folkeinvest, after barely reaching the minimum requirement of NOK 17m (£1.4m).

“Another example is Columbi Salmon, which has postponed its planned IPO several times. A third is Smart Salmon, which is still on the hunt for money. There is also Baring, which is in no rush to build its facility at Farsund.”

Electricity prices in the EU have increased tenfold in one year, presenting challenges for Columbi Salmon, which wants to become Europe’s leading “sustainable land-based salmon farmer”. Columbi Salmon has long planned to start construction of its land-based facility in Oostende, Belgium, where in 2020 the company purchased the plot of land on which the facility will be located. The company confirmed to SalmonBusiness that they have contracts on power delivery, but that the size of the contracts has not yet been decided. The company told Finansavisen at the end of 2020 that they were preparing to go public at the beginning of 2021.

In response, the founder of Denmark-based RAS Logic, Ivar Warrer-Hansen, said: “Until recently we had a salmon ‘gold rush’. These gold diggers are now leaving the wild West and heading back East. Many land-based salmon projects are on hold.

“One reason of course is that there still is not one project that has been able to produce more than around 50-60% of all the projected production plans and investors are getting a little weary. In most cases it is due to poor RAS concept. But the next hurdle is the escalating energy costs, not least in the EU.”

“Is land-based production in RAS as green as we proclaim?” asked Warrer-Hansen. “Well, both yes and no. It is a lot of energy to treat the water in a RAS all right, but then we have to treat all waste types, be it industrial or our own human waste. There are other food productions that have a higher environmental footprint. So RAS shouldn’t be singled out as it is more and more these days. It must still be emphasised that we have after all little or zero effect on the aquatic environment. Summa summarum, this means that RAS will bounce back.”

Meanwhile rising costs mean that Brazil’s tilapia industry is unlikely to see growth this year, contrary to earlier expectations. At the start of this year, investments were expected to fuel another year of double-digit growth in Brazil’s massive tilapia sector. But battered by soaring feed, fuel, energy and other input prices, allied to a reduction in consumer spending on animal proteins since the closing months of 2021, tilapia producers are now looking to end the year where they began.

“Everybody has put the brakes on expansion projects,” Francisco Medeiros, president of Brazilian aquaculture producers trade body Peixe BR, told IntraFish.

Norway’s cheap power dries up

In Norway, a country used to cheap electricity, prices are also skyrocketing. Until recently, Norway has had comparatively low electricity prices. Historically, electricity in the country has been plentiful, and almost entirely coming from hydropower.

Because electricity was so cheap, saving energy has not always been a top priority. Visitors may have noted a Norwegian propensity to leave the lights on even when no one is in the room. Even more wasteful are the stories of mountain cabin hot water tubs left on permanently “just in case” their owner would fancy an unplanned dip.

High electricity consumption in Norway is not just down to low prices, but also to the fact that the country has a cold climate and that most houses are heated with electricity. Electric heating means that cold weather will cause peaks in demand, which in turn will send the prices soaring.

While one kilowatt-hour of electricity cost on average NOK 0.61 (£0.05) in February of 2021, it had jumped to NOK 5.43 (£0.45)in August of 2022 – almost a tenfold increase. Factories have been forced to stop production since their costs are just too high.

Why are the prices reaching record levels? 2022 was characterised by less rain than usual in the south of Norway, and much more in the north. Residents of the country’s capital, Oslo, have been asked to take shorter showers and turn off the tap when brushing their teeth. Less rain means that the hydropower reservoirs are not as full, which puts upward pressure on electricity prices.

Many are also blaming two new subsea cables connecting Norway to the UK and Germany, which came into operation in 2021. Just a few months afterwards, in December, prices started soaring. For many people, the conclusion was clear: the new cables were to blame for the price hike. The link between higher prices and electricity export has made “cut the cables” a sort of slogan for people fed up with soaring bills.

British consumers could face even higher bills and potential energy shortages this winter, after Norway threatened to ration electricity exports. Norway’s oil and energy minister, Terje Aasland, told the Norwegian parliament on 8 August that refilling dams will be prioritised over power production when levels fall below the seasonal average.

The move was a blow to the UK, as well as countries such as Germany and the Netherlands, which rely on cheap Norwegian hydropower. A 450-mile interconnector joins Blyth, Northumberland, to Kvilldal power station. The €1.6bn (£1.35bn) North Sea Link cable, which was switched on last October, is able to channel up to 1.4 gigawatts of electricity between the two countries when demand is high in the UK and there is low domestic wind generation. This is enough to power about 5% of British homes.

Aasland said that electricity production in southern Norway was down 18% on last year and production in south-west Norway last week was the lowest seen this year so far. He said: “This results in historically high electricity prices and a situation where, for the first time in many years, we cannot completely rule out a period of electricity rationing in the spring. The probability of this is low.”

But as a whole, Norway is in a good position. Russia was the EU’s largest provider of natural gas in 2021. The second largest is Norway. Natural gas exports are generating enormous revenues for the Norwegian government, and power companies are raking in record sums.

Since oil and gas revenues are up, though, Norway can afford to support families. The government launched a power bill support scheme which covers 80% of the portion of the electricity price that exceeds NOK 0.70 (£0.06) per kWh. From October to December of this year, that percentage will jump to 90%.

How much will the UK government’s schemes help? What else is going to happen? Time will tell.

This article was updated on 26 October 2022.