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Is energy an expensive overhead cost or a strategic lever?

Energy is a critical input that no business can survive without. It is also an input for which the price is poised to be increasingly volatile due to a wide range of factors such as increased regulatory pressures, closure of aging power plants, commodity price volatility, high fixed costs, major capital investments and shifting supply and demand patterns. Yet, aside from trying to conserve, there isn’t much a business can do to control its energy costs and risks. Or is there?

Here’s the debate:

Energy is simply a cost of doing business.
We’ll pay whatever we have to pay, like always. And so will our competitors.
The future will be different.
A variety of forces are combining to make the cost of energy – and perhaps even the availability – much less predictable than in the past. Leading companies recognize this trend and are managing energy as a strategic asset. Those that don’t may find themselves at a serious disadvantage in the marketplace.
Our company is already conserving.
We have reduced our energy consumption through a variety of conservation initiatives such as replacing conventional light bulbs with compact fluorescents and using motion detectors to turn off lights when no one is in the room.

Conservation is just the beginning.
An effective energy management strategy must also consider:

  • Supply—the sources and cost of energy, both now and in the future.
  • Demand—how much energy a company needs to use and how efficiently it uses it.
  • People—how employees think about energy and how they can be engaged to manage it more efficiently.
  • Investment policy—how to increase the returns on energy-related investments.
Each of our facilities is already pursuing a broad approach to energy management.
Every operation is directly responsible for doing whatever it can to address its current and future energy needs.
An energy management strategy must be enterprise-wide.
Different regions will be affected differently. An enterprise-wide strategy allows a company to improve results by scaling energy improvements across multiple operations. It also enables strategic decisions that transcend organizational boundaries, such as shifting production to locations where energy is more plentiful and affordable.
We can’t afford to invest in an energy management program.
In today’s challenging business environment, survival is the top priority. We need to focus our time and resources on strategic issues that are critical to the business.
You can’t afford not to.
An effective strategy for managing energy helps mitigate the risks of critical shortages and price shocks that could put your business at a competitive disadvantage – or even shut you down. But the required changes can’t happen overnight. It’s time to get started.

Our take

Rebecca Ranich
Andrew Clinton

Rebecca Ranich, Director, Deloitte Consulting LLP

Andrew Clinton, Specialist Master, Deloitte Consulting LLP

Looking ahead, we expect the cost of energy to be less stable and predictable than in the past. Many of today’s older, less efficient power plants are already scheduled for shut down because it isn’t economically feasible to make them compliant with existing and expected regulations. New plants and infrastructure are being built or planned to ensure that supply will meet demand where and when it is needed; however, the cost of these major capital investments will be passed along to customers in the form of higher prices.

Shifting supply and demand patterns are likely to create an uneven impact across the country; for example, the move toward alternative energy sources may create a bias for new baseload power investments that rely heavily on a natural gas fleet, putting pressure on natural gas supplies. Factor in the unpredictability of commodity prices and government regulations and it’s clear that uncertainty may be the only thing that’s certain.

To insulate your business from energy-related challenges and price shocks, it‘s essential to develop a broad energy management strategy. Here are five key steps to help you get there: 

Assess energy across the enterprise. The path to higher efficiency begins with gathering and consolidating data from different silos within your business. An enterprise view helps you establish an internal baseline for measuring and monitoring the impact of your energy strategy, supports external benchmarking and makes it easier to define energy goals that align with your overall business strategy. It also shifts the focus from individual energy projects to broader programs that treat energy as a strategic asset.

Find the hot spots for improvement. Some business operations require more energy than others. For example, it takes more energy to melt sand into glass than to freeze ice cream. So it’s not really a question of which operations use the most energy, but which operations use more than they should? By tracking and analyzing data across your facilities and processes – and then comparing apples to apples – you can identify and prioritize the areas with the high-quality potential for improvement and that offer the high-quality return on investment for your business.

Map to existing solutions. Most improvement opportunities can be addressed with solutions that already exist today – whether it’s a new boiler, a more efficient chiller or expanded employee training. There’s no need to wait for a silver bullet. Also, most energy-efficiency projects deliver an attractive ROI, especially when risk is factored into the equation.

Optimize projects to achieve goals. With numerous energy-related projects competing for limited capital, you need to prioritize effectively, paying particular attention to sequence and timing. Precision is essential. For example, instead of assuming that energy prices will rise uniformly across the entire enterprise, look at current and forecasted energy costs for individual locations. Also, be sure to consider benefits beyond the bottom line, such as improvements to your carbon footprint and brand image.

Execute and measure results. Use your baseline data and investment plan as reference points to assess whether or not you are getting the results you expect. Make sure employees understand how their behavior affects energy use and what they can do to help implement and sustain the improvements. Aggressively scale successful improvements across the enterprise in order to leverage the potential ROI benefits.

In the old days, many companies didn’t have an IT strategy; now, IT strategies are a standard operating practice. The same will likely hold true for energy management. Companies that develop enterprise-wide strategies for managing energy can gain a critical advantage over the competition by improving their energy efficiency and insulating themselves from price increases. Those that don’t could be leaving money on the table and exposing themselves to unnecessary risk.

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