Energy management is on the boardroom agenda – what fueled this rise in status?

The boardroom is the place where the most strategic and essential issues surrounding the organisation are discussed and decided upon. So how is it that in recent times the board have begun to see ‘energy management’ on their quarterly agendas? Nadim Chaudhry identifies three key drivers:

The rise in energy prices

It may seem obvious, a little banal even, but the rise in energy prices is making a significant difference to the cost base of industrial organisations. More importantly, the projections for how far energy prices will rise in the future mean that organisations need to plan now to further protect their cost bases of the future.

Crystal Global on Financial ChartAs economies in Asia, Latin America and Africa begin to close the gap on Europe and North America, energy demand will increase, adding pressure to energy supply and driving energy prices upwards. With the continuing dominance of fossil fuels over technology solutions such as renewable energy sources, supply constraints will persist, again driving prices.
In the UK the Committee on Climate Change recently reported that they estimate an average increase of 26% to industrial energy prices by 2030. With prices rising, more and more businesses will see energy increasing as a percentage of their cost base leading to the involvement of the Executive Board in an increasingly strategic approach to energy management.

Increasingly sophisticated energy solutions and investments

Traditionally, large energy users have deployed in-house expertise to make decisions and implement changes around their energy management. Also, traditionally, Executive Board discussions and decisions have been focused on strategic level matters: those that impact the business in the long-term and have a high financial stake attached to them. And this is still the case. What’s changed is that energy management is now more complex and more sophisticated meaning that it impacts the business to a higher degree – over a longer period of time and with greater financial risk and incentive attached to it.

There has been a great deal of innovation in energy technology and how energy technology can integrate into the business and this necessitates more strategic thinking to ensure the right decisions are made. Solutions include high efficiency transformers, LED or induction lighting, on-site generation options (e.g. air heat pumps), CHP cogen units, and photovoltaic roofs, all of which are very long-term, strategic projects requiring the support and sanction of the board.

Additionally, industrial organisations should be exploring demand side response options. Some energy intensive businesses, such as steel making and foundaries, are looking at the opportunities to adapt molten steel furnaces into actual energy storage mediums to take benefit of quite considerable demand response payments. The impact this would make on the business balance sheet certainly makes it a matter for the boardroom.

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A key area that some businesses struggle with, is how to adapt budget and decision making processes to fit the new scenarios and choices. For example traditional facilities management teams are often charged with annual budget reductions. Therefore if paybacks and Return on Investment extend beyond the twelve month period of their budget planning these technologies will be not be chosen. Clearly products with higher CAPEX but much lower OPEX could well be in the interests of the business but the ability to make those decisions either needs to be granted lower down in the business, or those decisions must be pushed up to the board. Businesses need to be planning lower cost bases to enable them to continue to compete globally and short-term thinking could build high cost legacy plants.

If, and when, these decisions are then pushed to the Executive Board, it is critical that clear information is presented to the board around the CAPEX/ OPEX payback potential. In an ideal scenario the board would then also be able to make recommendations or give direction on decisions around finance solutions to smooth the CAPEX expenditures. There are options around equipment finance, leasing, third party financing, energy procurement contracts and more, which again, due to their sophisticated and complex nature really require the input of the board.

Culture of ever increasing detail at board level

In an ever more complex, globally competitive world, businesses are devoting greater attention to detail across all sectors of the business. This is akin to the “aggregation of marginal gains” theory most famously pioneered by Dave Brailsford when working with the British Olympic and Team Sky cycling teams. (You can read more on marginal gains here.)
In short, in a competitive environment, the board needs to be more aware and more hands-on with everything. In the future energy management will become a source of competitive advantage and it is Executive Boards and senior management teams who recognise this now and act now who will rise to the top and succeed as the market continues to shift.

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Innovation and involvement of the board

At first it may seem like overkill to have the Executive Board overseeing the energy management of an organisation. In reality, the participation of the board in understanding and directing how energy is managed with the organisation is a key step in full scale energy transformation. As outlined above, with energy cost & risk increasing, with energy projects becoming more strategic & long-term, with energy management potentially driving  competitive advantage, it is forward thinking boards who will integrate themselves into the detail now and reap the benefits later.