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A-B-C-D of the Business Case for Energy Efficiency
This article explores the different business prerogatives and the benefits that can be tapped into by adopting energy efficiency measures in the workplace.
Depleting energy resources, rising cost of energy and the threat of climate change have elevated the demand for sustainable energy initiatives globally. In the context of modern day businesses, effective energy management through energy efficiency has assumed a strong strategic value. While energy efficiency initiatives have been initiated by most businesses, the next generation solution would require a nuanced approach for maximizing the value of these initiatives. This article explores the four different business prerogatives and the benefits offered by energy efficiency measures, namely – Awards and Recognition, Bottom-line Savings, Compliance with Regulations and Design Innovation – conveniently called the A-B-C-D of the business case for energy efficiency.
The Global Case for Energy Efficiency
Climate change is defined as a long-term change in the Earth’s climate, or of a region on Earth and has been a topic of global interest over the last few decades. Today, there is strong scientific evidence on the subject, and the focus has promptly shifted to devising the most effective action plan for mitigating the harmful effects of climate change. Consequently, almost every major nation has publicly released and committed to a climate change action plan. The who’s who of the consulting world have conducted complex studies and drafted roadmaps for the same. Organizations like the United Nations have formalized work on this front through definition of formal standards and principles for addressing the issue. The words ‘business case’ is frequently being used across reports to define the most optimum pathway to mitigate the harmful impacts of climate change.
The commonality amongst all these approaches has been the focus on energy efficiency as the unanimous starting point for GHG emissions reduction initiatives (illustrated below).
Figure 1: Global GHG Cost Curve 2.0 (McKinsey & Company) – Energy Efficiency Identified as First Step to GHG Mitigation
Fossil fuel use, the major source for world’s energy requirement, accounts for ~57% of global anthropogenic GHG emissions . Logically therefore, the most potent GHG reduction initiatives would first look to reduce the consumption itself, while at the same time exploring cleaner alternative sources for energy. As per WBCSD , energy efficiency presents 50% of the potential to halve energy related CO2 emissions by 2050. Energy efficiency trumps also on the account that it creates immediate cost savings opportunities, and typically can be achieved with no or low investment – thereby presenting a strong business case.
Energy Efficiency is therefore the de-facto ‘low hanging fruit’ amongst the various GHG reduction measures – and there is still immense potential in exploring this further and tapping its full benefits.
Energy Efficiency – Changing from a Tactical Measure to Strategic Management Focus
Rising energy costs and the global push for energy efficiency as a means to reducing GHG emissions has prompted leading businesses to take this issue seriously. Globally, many organizations have taken the lead in defining energy efficiency programs – and have done well in successfully implementing the same to reap handsome energy cost savings too.
However, energy efficiency programs are typically viewed primarily as cost savings measures – an independent survey by Harris Interactive in 2011 (commissioned on behalf of Schneider Electric) revealed that of the over 300 senior executives surveyed at Fortune 1000 companies, 61% cited cost savings as the most important factor when considering energy efficiency measures. This mindset tends to relegate the energy efficiency programs into second or third tier of management interest, and makes this a more tactical measure rather than a strategic initiative, thereby limiting both the impact and visibility of energy efficiency programs. Obvious fallout of this is that most companies choose to invest on only the no-cost energy efficiency measures, and these programs in themselves lack sustained top management interest.
However, energy spend is today transforming itself from a commodity cost into a strategic investment.
Figure 2: The Factors Changing Energy from a Commodity Cost into a Strategic Investment
As illustrated in the graphic above, changing business dynamics, increased awareness and the ever increasing competition has lent distinct advantage to corporations who are able to manage their energy spend best – not only in sectors like Retail where margins are rated at a premium, but also in sectors operating within new energy regulations, or subjected to stakeholder expectation or striving for innovation as a means to differentiate in an increasingly competitive economy. It is therefore no surprise that that new age ‘energy champions’ within organizations are not just the ‘traditional’ facility managers, but more often the CXOs – a simple Google search of “CEO Energy Efficiency” yields 27.3 Million results (as on 12th May 2012), with links to energy efficiency commitments pledged by marquee industry CEOs. Clearly, energy efficiency is becoming a top business focus, and is in turn being sponsored by the company management, its shareholders and the Government.
The following sections further analyze the reasons for this ‘unprecedented’ veneration of energy efficiency, and how it helps improve performance against key business prerogatives. These ‘benefit levers’ namely brand image, profitability, regulatory compliance and product/service differentiation form the context for building of a more holistic and contemporary business case for energy efficiency projects.
The ‘A-B-C-D of the Business Case’ for Energy Efficiency
Figure 3: The "A-B-C-D" of Business Case for Energy Efficiency
A. Enhancing Brand Image Awards and Rebates:
Improved company or brand image is cited as the most important benefit of addressing sustainability . As has already been established, environmental sustainability initiatives, especially around climate change mitigation, typically start with energy efficiency measures. Ergo, one of the most direct benefits of taking up energy efficiency projects is a positive impact on the brand quotient of the pursuing organization.
Figure 4: Opportunities for Awards and Rebates through Energy Efficiency Projects
There are three major opportunities which enable organizations to reap awards and earn recognition through their energy efficiency initiatives thus improving their brand quotient:
1. Public Sustainability Scores
Stakeholders are increasingly becoming aware of the sustainability performance of corporate organizations. This has evolved today into a fairly standardized approach for measuring sustainability performance through various reporting and performance rating initiatives – like the GRI-G3 Guidelines for sustainability reporting and the Carbon Disclosure Project for carbon performance rating. Even stock indices have started publicly disclosing the ‘carbon scores’ of its members – a leading example being the Dow Jones Sustainability Index (DJSI). A potent energy efficiency program ensures strong performance against the environmental parameters across these publicly visible indices.
2. Third party certifications
The concept of third party certifications and recognition of efforts in energy efficiency has gained considerable momentum over the last decade. The most prominent building energy efficiency certification scheme is the Leadership in Energy and Environmental Design (LEED), developed by the US Green building Council (USGBC), for rating of buildings based on their energy and environment performance. Globally, there is already more than 2 Billion square feet of building space in commercial LEED certified projects – bearing testimony to not just the growing awareness for energy efficiency, but also the business case for gaining external recognition through rating systems.
3. Third party sustainability/energy awards
Top performers in the field of sustainability are awarded through specially constituted awards – many of these awards are specially focused at recognizing the energy efficiency initiatives. Almost every country and every sector has seen a surge in the number of such awards – and in many cases, these awards are constituted, sponsored or supported by the Government and Quasi-Government bodies (like the Sustainability Awards by US Department of Energy), thereby making the awards even more credible. Winner organizations in turn use these awards as an active tool in their marketing and brand building initiatives.
B. Enhancing Organization Profitability => Bottom-line Savings and More:
Energy prices have risen consistently due to increasing demand, depleting resources of fossil fuel and introduction of high cost alternative energy sources into the global energy source mix. At the same time, globalization has forced organizations round the world to streamline their operations, and minimize on operating costs for protecting their profits. The continuing financial turmoil globally has further precipitated the push for energy efficiency as a significant factor in easing up bottom-line pressures.
It is a known fact that energy efficiency would lead to energy savings. However, recent studies have shown the unprecedented power of energy efficiency in significantly improving the financial performance of organizations.
Figure 5: Equivalent financial impact of energy spend savings
As indicated in the table above, energy efficiency initiatives by themselves are powerful, and sometimes even more powerful than the conventional business mantras for improving business performance. For example, saving 10% in energy spend through energy efficiency initiatives is equivalent in its impact on the bottom-line to increasing 1.3% in sales. Energy efficiency, with its direct and indirect benefits, could therefore at times prove to be more powerful than direct campaigns for increasing sales. It is no surprise that an increasing number of business leaders are paying more attention to energy efficiency, and in many cases have also been at the fore-front of such initiatives.
C. Compliance Requirements
Concerns around energy security, energy price volatility and climate change are now being transformed into formal laws and regulations for their abatement. Most progressive government and regulatory bodies around the world have enforced energy efficiency mandates for businesses and other organizations to follow.
Figure 6: Number of Countries with Quantitative Energy Efficiency Targets across different continents
(Source: World Energy Council)
A survey of 88 countries representative of all global regions revealed that approximately 70% of the surveyed countries have established national energy efficiency programs with quantitative targets . This figure has doubled over 2006-2010 – with some countries like Brazil, China and India adopting laws post 2000.
The energy efficiency targets are defined based on region and sector specific factors. There are different modes of expression for efficiency targets – like rate of energy efficiency improvement, volume of savings, etc. e.g., the EU Directive on End-use Efficiency and Energy Services imposes upon all member countries a target of energy savings of 9% over the period 2008-2016.
Figure 7: Different modes of expression for Energy Efficiency targets
These regulations have mandated organizations to act on energy efficiency – pertinent examples being UK’s Carbon Reduction Commitment (CRC) scheme and Australia’s National Greenhouse Gas and Energy Reporting (NGER) scheme. Organizations are now mandated to assess, analyze and act on optimization of their energy consumption, with provisions for rebates and penalties in case of over and under-achievement against targets respectively. Progressive early adopters of energy efficiency thus stand to gain through maximization of federal incentives in the short term, and avoidance of monetary and reputational losses due to penalties in the long run.
D. Design Innovations
The push for energy efficiency has led organizations into defining innovative methods for carrying out their ‘regular’ business activities. These innovations are pervasive through the different functions of the organization, across technology, operations, business processes and even employee engagement. Differentiated innovation, centered on energy efficiency, has become a cornerstone for organizations with the intent of embracing sustainability as a means to highlight their product/service differentiation against their competitors.
44% of the 1500 business leaders responding to a survey (conducted by the MIT Sloan Management School, in collaboration with BCG) believed that addressing sustainability issues resulted in differentiation and innovation benefits. As has been already established, energy efficiency initiatives form the basis for environmental sustainability measures. Therefore a simple interpolation would imply that the benefits outlined against sustainability initiatives hold true for energy efficiency initiatives also.
Figure 8: Potential Differentiation and Innovation Benefits of Energy Efficiency Initiatives
Of the major benefits outlined by the business leaders, competitive advantage, employee satisfaction, product/service innovation, new sources for revenue and business model innovation figure prominently. It is therefore clear that the differentiation and innovation benefits of undertaking energy efficiency initiatives are cross functional, and extend beyond the point of immediate action.
The Future of Energy Efficiency Business Case – A Discussion
Energy management is both a systemic challenge, and a strategic imperative for businesses in the current environment. Creating the new age business case for energy efficiency therefore requires an analysis of a vast array of factors, and has turned into a subject matter of interest for the ‘energy managers’ upwards to the CXOs. The next generation energy efficiency measures would not only require the buy-in from the business management, but also a commitment to investments and sustained action. Also, it can be expected that given the cross-functional benefits of energy efficiency initiatives, the next generation of energy efficiency leaders would emerge from diverse functions of the business organization. It might also not be long before “Chief Energy and Environment Officer” becomes a regular, as also a much sought after position in the corporate business hierarchy.
The author Snehil Taparia has been an entrepreneur in the energy and sustainability space for a few years and is currently working with Wipro EcoEnergy as Consultant in the Global Enterprise Energy and Sustainability Management function.
- Report:“Pathways to a Low Carbon Economy” by McKinsey & Company
- IPCC 4th Assessment Report: Climate Change 2007: Synthesis Report
- World Business Council for Sustainable Development
- Survey conducted by the MIT Sloan Management School (in collaboration with BCG)
- Energy Star (US Govt) database
- Energy Efficiency: A Recipe for Success” – World Energy Council (2010)