Future of Business
19 April 2012
Looking ahead, the one certainty business leaders can count on is the rising price of energy. In the UK, for instance, over the past 15 years, the compound average annual electricity price increase for a medium-sized business has been nearly 4 per cent – twice the CPI rate of inflation.
This increase has occurred despite the Government’s commitment to competition, reform of the energy market, pressure from the regulator, online sourcing of energy and new gas discoveries. So if that is the past, what of the future? If recent research is anything to go by, we are in the early stages of a gathering storm, driven by three factors:
Undeterred by global financial crises, the BRIC economies continue to surge ahead, sucking in energy at ever increasing rates and driving up global energy prices.
The UK is just starting down the road of replacing 30 per cent of its power plant by the end of the decade – a change that will require £30m investment each day.
Hotter summers and more extreme weather in general will push up energy use as well as energy prices.
So given that turning a profit is often a challenge in the current environment, and energy costs are a significant part of a business’ cost and competitiveness mix, what can businesses do to respond?
As with any complex and changing situation, change brings opportunities. Business leaders should be focusing on these opportunities and using them as a lightning rod to bring long-term profitability improvements to their business. Of course, before diving into specific action plans, companies need to think about the risks they face and develop a genuine long-term strategy that provides a clear context for their activity and gains support at the highest level within their firms. Some businesses may also have golden opportunities through on or off-site production of renewable energy.
For most organisations however, there are four key areas of opportunity:
1. Invest in energy efficiency. Energy efficiency has been around for years, but seems to fall into the perennial “need to try harder” camp, like a promising student who has yet to fulfil their undoubted potential. The key for businesses is to recognise that they need to spend money to save money. Not just that, but often the decision will also require diagnostic tools so they can measure, monitor and recognise the benefits of their investment. This means recognising that, while efficiency measures might increase total energy consumption, they could also yield greater output. So this is not just about cutting back. If done properly however, the returns on investment are outstanding.
Good UK case studies exist and show a potential way forward. For example, Marks & Spencer claimed that their “Plan A” CSR strategy yielded a 23 per cent improvement in energy efficiency in 2010/11, including £13.5m of energy cost reductions in stores and distribution centres and fuel savings of £2m. BT, after investing significant sums to accurately measure its energy use, saved more than £18m in 2011 across its networks, data centres and buildings. Some of these improvements were from replacing ‘perfectly good equipment’ with less energy-intensive models, such as variable speed drives and low energy lighting. It now plans to roll out its initiatives globally.
2. Embrace ‘smart energy’. It will not happen overnight. But in the UK, for example, the changes from the commitment to deploying ‘smart metering’ nationwide can be expected to be very significant for those smaller businesses and residential consumers that currently only have one accurate energy reading every few months. While the metering technology itself may not get the heart racing, business leaders need to be aware of the way smart metering can empower them as energy consumers.
This includes enabling them to view and analyse information online, so energy management becomes far more visible. For example, knowing accurate half hourly electricity and gas use will help them to shop around suppliers and choose the very best tariff plan. Expect forward thinking energy suppliers to introduce new innovations that will provide further opportunity for saving.
BT’s investment in its own smart energy control is an example of the benefits on offer – annual savings of £6.2m were claimed in 2011 through identification and resolution of wasted energy via real-time smart metering data. While not all businesses have the scale of BT or the desire to invest in their own smart energy controls, the principles are much the same – really understanding your energy use and smart ways of changing this hold the key to reducing costs.
3. Participate in demand-side management. The UK Government is committed to what is commonly referred to as “demand-side management”. This is the ability for demand reduction at critical times to play a strategic role in improving market efficiency. Today some industrial customers have contracts with their electricity suppliers that give them a price break in exchange for offering the flexibility of reducing load in times of pressure. In the future, expect this capability to extend much further as smart energy and electricity market reform increase the incentives on offer.
One planned reform initiative is a new capacity market – expect it from around 2014. This is primarily designed to keep flexible generation available for times of shortage, but will also increase the incentives for a wider range of businesses to commit to reduce their energy use in times of shortfall or high market price. Experience from the USA suggests this will lead to the emergence of ‘demand aggregators’ to provide contractual commitments to these arrangements and offer services to a large chunk of the UK market that is beyond the normal reach of the Big Six suppliers.
4. Pretend you’re in crisis. Embracing market changes and investing in new energy efficiency may be all very well, but what about something more immediate? “Never waste a good crisis” may be a phrase with currency from recent events in the global financial sector, but it can apply equally well to more mundane situations, such as tackling energy waste.
Back in 1992, in my home country of New Zealand, there was a serious lack of rainfall that – given the dominance of hydropower – eventually caused a crisis in energy. To avert a blackout catastrophe the government moved into crisis mode and instigated a campaign telling New Zealanders they needed to reduce their electricity use by 15 per cent. It worked. Perhaps surprisingly to many, extra vigilance and innovative action enabled this level of saving to be achieved and the crisis was averted.
What has stuck in my mind ever since is the relative ease with which businesses could reduce their energy use. Lights were put on timers, photocopiers and printers were switched off over weekends, air conditioning and heating systems were adjusted. Not a lot was spent, but a lot was saved through a sense of crisis. If your business’s survival depended on saving 15 per cent, what might you do?
The reality with energy use is it doesn’t get the focus it deserves – reliability and reasonable cost are enough to tick the boxes for most. But as the future storm clouds gather there are plenty of opportunities that will enable today’s business leaders to turn this to their distinct advantage.