Thinking strategically about energy management can offer substantial financial returns and other benefits, ranging from improving company effectiveness and reducing costs to expanding markets and improving stakeholder relations, according to a report from The Conference Board.
NEW YORK — Thinking strategically about energy management can offer substantial financial returns and other benefits, ranging from improving company effectiveness and reducing costs to expanding markets and improving stakeholder relations, according to a report from The Conference Board.
"Energy is an essential input for all corporations even though the significance of its use as a factor in business operations varies from sector to sector and company to company," says Chuck Bennett, PhD, co-author of the report. "But the impetus to improve energy management practices is increasing exponentially with the cost of, and competition for, finite supplies of energy."
This report is based on the work of The Conference Board's Strategic Energy Management Advisory Group, comprising companies from a variety of industries with extensive planning for energy management.
Unlike other aspects of operations management such as quality or environmental programs, strategic approaches to energy planning and management are less well developed, despite the existence of excellent individual company practices and expert guidance available from several government and non- governmental agencies and organizations. The opportunity exists, however, for widespread improvements that will benefit not only individual companies but the broader economy and environment.
"To effectively manage energy, companies must understand how energy relates to their overall business model, and its potential for improving a company's bottom line," says Dr. Bennett's co-author, Meredith Armstrong Whiting. "Managing the cost of supply and reducing overall energy cost through efficiency enhancement may initially be the most effective ways of leveraging a strategic approach to energy management because of the direct near-term financial benefits to the company.
AVAILABILITY IS A PRIME CONCERN
In addition to price and supply risks, dramatically illustrated by the interruption of oil production in the Gulf as a result of Hurricane Katrina, additional risks are being factored into many companies' energy management planning, such as the availability of certain fuels including natural gas in certain regions or the potential for regulation of energy sources and emissions rates. Also, the increasing fragility of the U.S. electrical transmission system and the growing risk of electricity interruption may be changing the way decisions to invest in distributed sources of electrical energy are made.
KEY QUESTIONS FOR DEVELOPING AN ENERGY STRATEGY
The report says that companies must consider the following questions when formulating an energy plan:
--How can we use as little energy as possible?
--How much energy is needed for various components of the business?
--Which energy source is best for each component?
--How can we obtain this energy most advantageously?
--How can energy considerations and knowledge contribute to new business opportunities?
Companies should then take steps to evaluate and select efficiency options and supply options and identify energy-related new business opportunities.
POSITIONING CHANGES IN ENERGY PLANS
As energy becomes a higher profile issue, whether due to cost, geopolitics, environment or other factors, how companies manage energy increases in importance in the perception of many stakeholders.
Energy strategy and management practices are increasingly relevant to companies' evaluations of what they do, how they behave while doing it, and how they position what they do. Also, factors such as carbon and climate change and environmental effects of energy use combine with concerns for the environmental aspects of sustainability to affect how energy is viewed by companies and their stakeholders. The companies which participated in The Conference Board's advisory group said that energy and environment-especially carbon-related activities-must be managed in close coordination.
Many factors that should be considered in deciding to adopt a strategic business approach to energy cut across three categories of "drivers" - business opportunities, managing risk and company positioning. For example, while regulation may be the initial driver, economic benefits or enhanced perception of the company in the marketplace may emerge as the more enduring motivators.
Energy management is frequently perceived as a financial and engineering matter. As long as serious cost spikes and operations interruptions do not occur, energy is not a focal issue for senior management or the average employee. While this approach is generally adequate, it is not appropriate when a company aims for sustainable and strategic energy management.
To fully achieve their potential benefits and value, energy decisions must be integrated into the culture or fabric of a company's management policies and practices. Doing this requires understanding and commitment at every level, from the most senior managers and board members to individual staff members, whose daily actions affect overall energy performance. According to ENERGY STAR, the government-backed program helping businesses and individuals protect the environment through superior energy efficiency, companies can save as much as 10 percent of their annual energy operating costs through culture- changing initiatives regarding energy use.
Engaging employees, both managers and line workers, can be enhanced by appropriate accountability, reward and recognition approaches. For example, if a plant manager is to be committed to an energy efficiency process, his/her performance objectives must reflect this and compensation must reinforce it, or it becomes a "nice-to-do" activity that may or may not get attention.
Forward looking companies are extending the concept of energy management to their product lines and service development. Key considerations include: the useful life of capital equipment and planned turnover and the costs and potential benefits of facility or equipment modifications to improve efficiency vs. waiting for turnover.
ENERGY NOT NEEDED DOESN'T COST A THING
"The fundamental business argument for improving energy efficiency is that energy that is not needed does not cost anything," says Dr. Bennett. "Incentives to save energy include the increasing costs of traditional energy supplies and decreasing costs for alternatives and growing concern about the environmental consequences of burning carbon-based fuels."
A baseline understanding of energy use and their products' energy profiles is essential to any company's strategic energy plan. However, the baseline need not be comprehensive to get started: many companies begin by focusing on specific operations and locations to "test" their approaches and the value of the results.
Understanding relative costs in different parts of the business may be even more important than understanding the total costs. Even if they choose to adapt an energy strategy, not all companies may be able or willing to implement all possible responses to opportunities across the enterprise at one time. Further, a decision to invest in facility or equipment modification may rest on whether or not the proposed project will meet a company's "hurdle rate" for return on investment. Outsourcing and "performance contracting" may be one way to achieve the required return.
But security of supply may be the most important variable in an energy plan. The extent to which a company can bear interruptions in energy supply or, in the case of electricity, variations in quality, may be the essential driver for a strategy and specific decisions made. The underlying goals of energy supply management are to obtain the right energy at the right price and to assure that adequate supply is available to meet company business goals. In most cases, purchasing in greater volume generates a more favorable unit price. This can be enterprise-wide for some, or for a certain type of energy like aviation fuel, but it will more likely be regional. Because of the dynamic nature of energy markets and regulatory environments, new opportunities to improve supplies may be frequent.
DESIGNING ENERGY-WISE PRODUCTS
Building energy efficiency into products may provide market advantage, especially if it can also produce a cost benefit. Many household appliance companies such as Whirlpool have long been involved with ENERGY STAR and have developed and marketed products that are highly energy efficient.
Regulations impact a company's decision about energy indirectly more often than directly. They are especially significant for companies that produce energy by buying fuels and converting them to electricity or steam - companies that simply buy the latter in the open market may be less directly affected. Emissions rates for pollutants will likely be subject to increased regulation. Such regulation affects the operating risks associated with energy choices and frequently alters energy consumption costs by requiring controls.
"As concern for the environmental effects of energy production increase, the likelihood of additional regulation grows," says Whiting. "Some jurisdictions are beginning to set rules for the consumption of renewable energy such as wind or solar. Looming largest, however, are rules limiting carbon emissions."
In the U.S., such rules are primarily being developed at the state level, which will create significant challenges for business. In a sense, regulations, including taxes on certain types of energy, are simply a different dimension of energy costs. For companies that produce their own energy, the frequently changing nature of the regulatory landscape provides an ongoing challenge for energy decision-making, especially when longer-term investments are being considered.
LESS ENERGY CONSUMED IS FACTOR IN CORPORATE RESPONSIBILITY
Increasingly, companies are adopting business postures that are sensitive to concerns of stakeholders beyond investors and regulators, frequently within the context of sustainability, corporate citizenship, corporate social responsibility, or the environment. The implications are that the company will take actions to minimize its adverse impacts on and increase its contributions to environmental and societal quality. Such positioning implies that some of the company's actions are not intended solely to maximize profit. Responsible energy management can be a significant element in a company's overall sustainability strategy.
Source: PR Newswire, A Roadmap for Strategic Energy Planning and Management
