Energy finally reaching the concerns of senior management

July 10, 2008
Energy Expert Peter Garforth says energy is finally making it to the top of the list of senior management’s concerns, and that the news about high energy costs isn't all bad.

Rising energy prices are rarely greeted as harbingers of good news. In the United States, the almost universal reaction to last week’s record oil prices has been negative. This, along with the sustained pressure on natural gas prices and electricity rates, apparently leaves little to celebrate. Industry is feeling the crunch from energy budgets being blown out of the water. Energy managers are being challenged to find the “answer” to rising energy costs, a challenge that has neither a quick — nor an easy — solution. This unease is further exacerbated by uncertainties over climate change legislation with estimates of the impacts ranging from minimal to complete disaster.

Maybe this uncomfortable picture has the seeds of good news in it. The first piece of good news is that energy is finally and unquestionably making it toward the top of the list of senior management’s concerns. This alone should have every energy manager cheering. For too long at most companies, energy productivity concerns have ranked just above the color of the lines in the parking lot. The energy manager’s role has suddenly become not only very visible, but also an exciting opportunity for personal growth and career development.

Justifying resources to reduce current energy costs and mitigate uncertainty has become a lot easier. The arithmetic is really simple. The returns on energy productivity projects increase linearly with increases in market prices, and become substantially more attractive as uncertainty grows. This opens up technical and managerial options that would have been unthinkable even a couple of years ago. Large-scale heat recovery, cogeneration, renewable energy and even fundamental redesign of manufacturing processes are on the table like never before. This challenges us to question conventional wisdom and take a look at choices that traditionally would have been rejected.

There is good news that goes way beyond simply managing the cost and other energy effects. Within companies, groups that had little or no communication are challenged to work hand-in-hand to manage the economic, environmental and reliability effects of energy today and in the future. As multidisciplinary teams come together to manage one challenge, they inevitably find other areas where they can enhance the operational performance.

Traditionally industrialized countries have seen vast areas of their manufacturing base move east and south. We should pause and remember that this migration is really a continuation of a process that began at the start of the industrial revolution. As the steam-driven loom replaced the local weaver, and trains and canals moved products around Europe and America, traditional employment migrated from local workshops to the great manufacturing centers of Manchester, Essen and Pittsburgh. In effect, this process is continuing with the growth of manufacturing in China, India, Mexico and elsewhere.

Two centuries of manufacturing concentration and migration have been built in almost equal parts on labor cost, technical innovation and very cheap, freely available energy. Low-cost energy allowed goods to be moved within and between continents to economically serve distant markets. It also frequently disguised the inefficiencies inherent in many factories, and did little to encourage sustained improvement.

Rapidly rising energy costs are suddenly changing 200 years of assumptions. The cost benefit of distant manufacturing is being eroded in large part by the increases in transport costs. As energy prices rise, the competitive radius of the farm or factory shrinks. For countries and regions that have borne the brunt of rapid globalization, this can only been seen as a good thing. It’s likely that these regions, which clearly include large parts of the United States and Western Europe, are entering a phase of reindustrialization.

Now is the time for the strategic marketing teams to be analyzing the effects of energy costs on their strategic competitors and selectively positioning new, efficient manufacturing to compete in a restructured world. In this world, the proximity of manufacturing to markets will again become a factor.

Ironically, it’s also the time to look for opportunities in the same countries that have become the manufacturing competitors. Rising energy prices, and the inevitable removal of energy subsidies, will push these manufacturers to focus on their domestic and regional consumers, in turn redefining their marketing and efficiency challenges. This trend will produce new opportunities, the true scope of which is yet to be understood.

The party built on centuries of cheap energy is running out of steam. The new party built on creativity and energy efficiency is just beginning. On balance, there is probably more good news than bad in rising energy prices.

Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. E-mail him at [email protected].