5 steps for a robust energy strategy

Energy Efficiency

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03 October 2017

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Jürgen Ritzek

According to the recently published article in the Harvard Business Review "Energy Strategy for the C-suite", energy is climbing up the corporate agenda. This is true and based on

  • climate change and global carbon regulation,
  • increasing pressures on natural resources,
  • rising expectations about corporate environmental performance,
  • innovations in energy technologies and business models, and
  • plummeting renewable energy prices

All are representing megatrends leading to a changing business environment with new risks and new paths to value creation.

According to Andrew Winston, George Favaloro and Tim Healy, many companies have already developed some kind of energy strategies. But they are missing the integration with the overall strategy and do not explicitly adress the strategic implications of the global megatrends. To do so, they recommend 5 steps to build a robust energy strategy.

1. Start with the C-Level Mandate

Although not new, this is a MUST to begin with: CEO committment and a clear governance structure is the foundation of any successfull implementation.

It means that the CEO should appoint a senior executive to serve as a champion. Depending on the industry that could be the COO or CFO. First task of this senior executive is to assemble a crosss-functional team from operations, facilities, finance, legal, procurement and sustainability.

2. Integrate Energy into the Company´s Vision and Operations

The team need to start with assessing the firm´s internal and external energy impacts. There are various questions to be answered such as "How much energy does our firm use, and what does it cost? What impact does it have on key financial indicators like costs of goods sold? Do we capitalize on opportunities to use renewables? How does this algn with customer, investor and employee expectations, and how do we compare with competitors?"

Answers will quickly reveal performance opportunities and gaps and allow to develop an action plan.

A key task is then to create the right incentive schemes throuhgout the entire organization. This needs to be supported by advise on how to integrate energy considerations with other strategic processes and priorities. An example is the risk assessment. Facility and and operations managers should consider energy in their resilience and business continuity planning.

Another key area is the alignment of procurement with energy users. Previous energy contracts with certain on-off peak pricing structures might look different when considering new storage or demand-response solutions in the energy use processes. Especially when integrating on-side renewables.

3. Track Energy at All Levels

According to the authors, it is often surprising for C-suite executives that companies can not easily say how much energy they consume on corporate and individual operational levels. Energy is amongst people, product costs, facilities and equipment the only one that is most often not monitored and managed carefully.

And monitoring and analyzing energy use can reveal also operating issues affecting costs, performance ans quality.

Companies should also look down into their supply chain. Especially tier1 supplier can have a major indirect impact on costs or achievement of carbon targets as the are also exposed to price volatility and respponsible for a significant level of carbon for the final product or services.

4. Shift to Renewables and Other Advanced Technologies

The market for clean energy technology is changing fast and companies need to understand technologies as well as financing options and the business models behind. That covers renewables but also e.g. storage, meters and LED.

For example, in 2015, the average price of electricity from new long-term contract wind power projects in US was two cents per kilowatt-hour!

Many corporations are already experimenting witth capturing waste heat for heating and cooling, burning methan from landfills, fuel cells and many more.

Understanding the financing behind the new opportunities is also an area many companies have little knowledge at the moment. Whereas hedging often comes first, the new financial market developments towards green bonds aand ratings can even impact the companies overall costs and/or ability to acess capital markets.

And there are further benefits ranging from reducing policy risks when it comes to carbon pricing, brand benefits and opportuinities for competitive differentiation.

5. Engage Key Stakeholders

Companies need also to have a coherent strategy to engage with stakeholders beyond the operational aspects like increasing efficiency or diversifying energy sources.

With clean energy markets rapidly evolving, there is no need anymore to buy from local regulated utility. Dynamic pricing, new financing mechanism, smart grid, battery storage or on-site power generation are new opportunities but are in an early stage with new policy and regulation under development. Engaging with stakeholders to advocate for policies that encourages transformation to the new energy systems need to be on the agenda.

And they neeed to engage with customers, communities, investors and employees as the new solutions will lead companies becoming an integral part of the future energy system - miles away fro  the old energy purchase contract of the past.

Conclusion

The biggest hurdle for many remains the perception that energy is just a cost to be managed. And for smaller companies that this is only something for the big ones.

But this is a misperception. According to the authors, the five steps can be done by most companies, and they will deliver substantial benefits rapidly.

"The drivers of competitive advantage are always evolving. Not long ago, quality was a fringe idea and IT was just a cost center. Now quality is table stakes, and fluency with big data is mission-critical. Energy is on a similar tajectory. What was once the hidden deep in procurement is rising to take its place among the key levers of business success."

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Source

This article is a summary based on the article published in Harvard Business Review in the January-February edition (pp. 138-146)

https://hbr.org/2017/01/energy-strategy-for-the-c-suite

About the Author

Juergen Ritzek is co-founder and Business Director of EEIP