Competitive advantage arises out of a focus on energy even when prices are low

Energy Expert Peter Garforth says be wary of economic factors outside your control.

By Peter Garforth, Garforth International

Energy management in the United States is once again in danger of entering a phase of neglect. The fears of runaway energy prices have been calmed during the past few months of relatively stable prices. Oil prices are still relatively high when viewed historically, but well below their recent peaks. Natural gas, on the other hand, is approaching historic lows following the dramatic run-ups following Hurricane Katrina. With the probability of significant new domestic gas sources coming on stream in the coming years, there’s a sense that these prices will stay low forever. Coal is way down from its 2008 high, with a relatively benign short-term pricing outlook.

In periods like this, especially in an economy under stress, it’s easy to be lulled into putting energy management on the back burner. The fact that one reason for the low prices is the relatively soft demand in a poor economy might get overlooked. The temptation to reduce the energy management focus can prove to be a false economy as it ignores many of energy’s real costs. Most North American companies have a tendency to manage energy with a degree of urgency only when current prices are high. This risks being on the wrong side of the real costs of energy and is worthy of a little more examination.

The first area is the cost and availability of equipment and expertise. Because most U.S. companies react to high prices at the same time, the best experts are overstretched and costly, and critical equipment might be both premium priced and have long lead times. Ironically, this is exacerbated by global demand on a much more consistent basis from Europe, and increasingly China, in support of their aggressive long-term clean and renewable energy policies. The conclusion is obvious — maintain a steady program of energy productivity investment and process improvements while keeping an eye on the long-term quality of the business and not the day-to-day fluctuations of energy pricing.

If, as inevitably happens, energy prices suddenly move substantially higher, the company with consistent energy management has a clear and immediate competitive advantage. They’re also able to focus on their core business instead of scrambling to deal with the “emergency” of high energy prices.

If energy prices suddenly move substantially higher, the company with consistent energy management has a clear and immediate competitive advantage.

– Peter Garforth

The next area is reliability. The North American electrical grid is experiencing many more incidents of outages and quality issues not caused by weather events. At a minimum, a company should be thoroughly aware and up-to-date on the supply reliability risks and how they might affect the business process. A single event that causes a production shut-down for even a few hours might have major financial and customer satisfaction consequences. In my experience, these costs often far exceed the investments needed to prevent or mitigate them.

An energy plan that fails to address energy reliability is incomplete and thus under-resourced. A key role of the energy manager is to understand these risks far beyond the direct costs of the energy commodities and to have implemented solutions that ensure business continuity and value. Increasingly, this involves the use of higher levels of efficiency and more on-site clean and renewable energy generation than has been traditional. From time to time, teaming with neighboring energy users can reinforce reliability strategies. These combinations not only produce powerful reliability solutions, they usually also manage day-to-day costs relatively effectively.

The combination of business continuity and cash flow advantages when energy prices are rising are usually more than enough reasons to invest in effective energy management. Now we come to the third cost of poor energy management — environment. This is an area where the uncertainty of future energy-related costs is the underlying concern. These uncertainties arise predominantly from the future effects of greenhouse regulation, costs that could be anywhere between negligible and potentially threatening to the entire business. The easiest way to reduce these cost risks is to invest in high levels of efficiency and clean and renewable energy. These are effectively the same strategies needed to manage price volatility and supply reliability.

Before leaving the uncertain costs of climate change, it’s important not to overlook possible costs on the business. Universities in the United States are scrambling to reduce their obvious carbon footprints under pressure from well-organized initiatives that potential students are taking seriously. Suppliers to major companies like Walmart and Tesco are making sure their energy use and the resulting greenhouse gases embedded in their products meet increasingly stringent expectations. As regulations on climate change tighten around the world, major global customers are challenging their suppliers’ climate plans, which in most cases are intimately linked to their energy plans. Again, a preemptive approach, working with customers, will have a substantially lower cost than reacting when the business is under the gun.

Allowing today’s headline price of energy to drive energy management focus and investments might be the most expensive decision many companies will make.

Peter Garforth is principal of Garforth International, Toledo, Ohio. He can be reached at peter@garforthint.com.

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