An overview of the cost of energy

What a typical dairy farm’s electricity consumption might be, plus an overview of how energy pricing works.

Unlike other sectors, there is little firm data publicly available to show the electricity requirements in the dairy sector. However, the table below illustrates typical consumptions drawn from the consultancy work of NFU Energy over several years.

Table 1. Costs correct as at summer 2020

Although all dairy farms are different, the projects carried out (including an intensive survey of 250 dairy farms in Wales) bear out these numbers. The differences can often be due to tangible factors such as management systems, parlour types or presence of other mixed farm energy uses.

The cost of energy

You can buy electricity on contract from a range of competing suppliers and, for most small businesses, electricity prices are a mixture of fixed costs and unit charges which may vary throughout the day. So, knowing when the prices are cheapest and making best use of equipment during those periods is really important.

The traditional day/night electricity tariff was created to stimulate night-time demand and shift consumption away from peak periods and may present a good opportunity for dairy farmers.

Because of high electricity use before 7am, dairy farming can benefit from day tariff structures, especially the seven-hour cheaper night rate, sometimes called Economy 7 or E7. This structure provides between 15-25% reduction over day rate electricity for the period midnight to 7am GMT.

To determine whether a single rate or a time of day tariff is more beneficial for you means knowing when in the day electricity is used. Typically, an hourly or half hourly calculation is done to work out that period cost and then summed up for the day in each scenario. Because dairy farm energy profiles are usually very similar, this can be done easily and multiplied by 365 to give the annual saving.

The effect of renewable electricity generation 

The adoption of renewable electricity generation, especially solar PV, can mean that the traditional solution of E7 type tariffs are no longer appropriate. There is a wide disparity between what you will pay for electricity in comparison to what you would receive if you sold that electricity to the grid.

Whilst the cost of electricity is underpinned by the cost of generation, largely from gas, it is also dominated by the additional charges levied to provide revenue to support renewables generation and taxation. This means more than half of these costs are fixed by such charges.

Therefore, to sell electricity you will often only receive 5-6p/kWh compared to the 13 p/kWh night rate and 18 p/kWh day rate costs for imported electricity. Perversely, this sometimes results in a farmer loosing interest in becoming more efficient as the value of their exported power being perceptively relatively low that might as well be used.

The presence or renewable generation provides opportunity to move your consumption patterns to match generation patterns and benefit by avoiding imported electricity, with sale of electricity to the grid as a last resort. Depending on your resulting pattern of use it then may be more beneficial to have a single rate tariff (where all imported electricity is at the same cost within the day) as this will be at a lower ‘average’ rate.

Example: a farm recently surveyed is using 134,000 kWh per year with a 33/66% split between night and day units on a two-rate tariff. Total electricity costs at £21,920 per annum using this tariff structure would equal 16p/kWh equivalent if all at a single rate. Therefore, if a contract can be arranged at less than this then a single rate would be more cost effective.

Fixed price vs flexible purchasing

To get the best electricity deal, you need to shop around and be prepared to switch supplier at each contract renewal. Electricity is usually sold on contract for fixed periods, typically 1–3 years. When moving from one supplier to the other you have to be careful to terminate old contracts as well as signing up for your new one, so that you are not placed on ‘out of contract rates’ which are punitive.

Unpredictablility in energy prices is both a concern and an opportunity. Whilst most producers purchase their energy on a fixed price contract, if you have a larger connection (100 kW demand or greater – likely to be the largest dairy farms or farms with other uses) you are able to purchase more flexibly by entering into a contract that allows you to purchase energy in daily, weekly or monthly blocks.

This allows producers to benefit from reducing prices more immediately and employ a consumption and purchasing strategy to reduce costs, without necessarily altering their primary consumption requirements. The employment of battery technologies in times to come may provide additional opportunity for this.