17 April 2012
Expanding energy horizons
Rising costs wouldn't hurt nearly so much, advises EDF Energy, if only industry would incorporate energy issues into its long-term strategic planning
No one is immune to the rising cost of energy. Despite an increasing focus on energy efficiency, WM's Energy Survey showed that 56% of businesses were hit by bigger bills last year. And few of them see any reason for optimism in the foreseeable future.
Yet the fact remains that some organisations are effectively controlling or even reducing their energy bills – around 25% have actually cut their costs in this area. So have they hit upon a formula unknown to the majority of manufacturers?
According to EDF Energy's B2B risk strategist, Steve Mortimer, the companies which most successfully challenge rising prices are also those most likely to treat their energy issues as an integral part of their long-term business planning. "Energy is a significant component of a manufacturer's cost base. However it seems many businesses view it in isolation from other inputs or separate from other improvement objectives. It is established good practice to plan your business over one-, three- and five-year horizons. Aligning energy procurement and the management of volume and usage on the same rolling horizon makes a great deal of sense."
How does this play in practice? Mortimer's role is to help businesses identify potential threats to their operation that relate to their energy costs and plan their response: "The key to managing risk is to provide as much certainty as possible to your internal and external stakeholders. You can't mitigate all risks completely but at least if you are aware of them, you can start putting the controls in place to ensure that adverse events aren't a major surprise."
Foremost among the avoidable surprises are price fluctuations. Mortimer is still surprised that so many businesses prefer to spend their time second-guessing the market, which they cannot hope to influence, rather than focusing on something entirely within their own control – their own use of energy and how to optimise it. "The survey shows that only a quarter buy their energy according to a defined risk management strategy and over half said they were trying to fix their prices only for a year or less.
"At a time when most commodity prices are rising – not just energy – most manufacturers crave budget certainty. Rather than speculate on something that can only add to the imponderables, it's far more productive to lock in the certainties and refine their business model on a firm, predictable foundation."
Two-thirds of those surveyed hoped to cut their energy costs by switching or renegotiating their deal. The effectiveness of this tactic is not, however, supported by the evidence. Mortimer points out that three out of four of the companies who have actually been successful in bringing their costs down have done it by reducing the energy they use, rather than the price they pay for it. "If you don't have control over your price and properly understand it when calculating your volume strategy then, bluntly, you are putting yourself at more risk."
None of the businesses surveyed reported relating their energy purchasing to their order book. Mike Capper, who heads product development in the company's energy services operation, is not surprised. Even though energy has clearly become a boardroom issue over the last few years, he has found few companies that regard it as an integral part of their sales and operations planning (SOP), the process that regularly reviews customer demand against available resources and replans over a rolling horizon. "Yet if you align price with your order book and other targets, you are better placed to tackle it jointly with other business priorities to deliver more tangible benefits all round."
In his view, it is only too easy for this lack of joined-up thinking to extend way beyond the boardroom. Without firm strategy deployment, it is only too easy for operational areas to go their own way: "In fact, it is often the larger organisations that run the greatest risk, because they have more sites, each capable of taking wider initiatives without reference to an overall plan." The silo mentality, which has mainly disappeared from other aspects of manufacturing, still exists in energy management, largely because the responsibility can be fragmented over so many different job functions. Without clear targets and agreed actions, it is easy for separate departments – each working with the best of intentions – to undermine each other's efforts.
For example, how often do the people responsible for purchasing energy get involved in drawing up maintenance contracts? "Probably not as often as they should," explains Capper. "Yet in manufacturing, a common strategy is really important because small changes in process can have big effects on energy usage. So it really helps if the two functions work together in structuring suppliers' KPIs [key performance indicators]. If the plan is to optimise energy usage, reducing consumption by 10% over a five-year horizon, then that needs to be reflected in all outsourcing contracts. Otherwise you could have suppliers who achieve one of your business goals at the expense of another."
He is adamant that in this, as in so many aspects of energy management, it is essential to take a holistic view. "It is only too easy to make one area of the business more efficient to the detriment of others. The classic example is introducing new equipment on to the site to increase production throughput and operational efficiency, but it unintentionally increases energy and maintenance costs, cancelling out the potential savings."
In many ways, the survey shows that UK industry has the right building blocks in place for an integrated energy strategy. Firstly, nine out of 10 are measuring their energy use, usually in house. Many businesses put new meters in place to meet the requirements of the Carbon Reduction Commitment (CRC). So will the chancellor's recent Budget promise to overhaul the "cumbersome, bureaucratic CRC" alter this? Capper hopes not. "Some elements of the scheme are challenging to report on but the basics are very simple – tell me what sites you own and how much energy they are using. Knowing these things is actually incredibly useful. You can't start reducing energy costs without knowing how much you are actually using and where you are using it. And energy-monitoring software is surprisingly cheap and easy to configure."
Secondly, nearly two-thirds are actively working to engage their employees in cutting energy costs. While agreeing that involvement and accountability are vital to a risk aware culture, Capper says that industry shouldn't overlook more pragmatic measures. "You have to face up to the culture you have today. There are times when, with the best will in the world, people will forget and it is both easier and often cheaper to take it out of their hands. Devices like time switches, overrides and automated settings will always have a part to play for the simple reason that they add consistency and take away the risk of a common human error – forgetfulness."
If there is one clear message to emerge from the Energy Report, it is companies' earnest determination to control their energy costs before their energy costs control them. It is perhaps counter intuitive that an energy supplier like EDF Energy is prepared to pour so much of its expertise into helping them achieve this. But Mortimer is adamant that the goal is long-term partnership rather than short-term gain: "We want our customers to optimise how they use their power in growing their businesses. And that is best achieved by helping them to consider the entirety of their energy use and how it relates to their overall focus and direction."
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