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EY guest columnists John de Yonge and Phil Dominy
Global survey reveals focus on efficiency, increasing use of renewable energy and growing self-generation
The largest global corporations are meeting the transition to a low-carbon and resource-efficient economy with proactive energy strategies involving the C-suite level.
Global energy mix survey
We conducted a telephone survey of executives involved in corporate energy strategy at 100 companies with revenues of US$1b or more. Questions focused on energy spend, types of energy used, energy strategy, and outlook.
The companies were those in energy-intensive sectors with a balanced global distribution. 72% have revenues exceeding US$1b, and 28% revenues of US$10b or more. They are mostly spread between North America (35%), EMEIA (35%) and Asia-Pacific (30%). The largest industry groups are diversified industrial products (29%), retail and wholesale (16%) and automotive (9%).
Respondents opting to disclose participation include British Airways, Celgene, Goodyear Tire & Rubber Company, Magna International, Arvind Ltd, China Southern Airlines, Marks & Spencer Group and Rete Ferroviaria Italiana SpA.
High energy costs
High energy costs expected to increase further set the context for the discussion. For half the respondents, energy expenditure represents 5% or more of operating costs. 22% said 20% or more of operating costs go on energy.
In absolute terms, this translates into an annual energy spend of at least US$50m for 40% of respondents, with 27% spending US$100m or more.
73% of respondents foresee already substantial energy costs rising over the next five years. 38% expect energy costs to rise by 15% or more in this period.
Formal energy strategy and implementation plan
To address this, 70% of respondents have a formal strategy and implementation plan to manage the mix of different energy sources used. 51% have a global strategy and 46% say this applies at country or business unit level.
Interestingly, 16% of respondents said their strategy is not limited to their own operations but extends to their supply chain.
Energy strategy objectives
When asked to comment on their energy strategy objectives, the majority said:
- Cost reduction through efficiency was their primary concern
- Also key were energy conservation and minimizing their carbon footprint
- Many also have targets to meet a portion of their energy needs from renewable sources
- Ensuring reliability of energy supply is also key.
Respondents said financing and capital issues related to energy mix projects was the biggest strategy implementation challenge:
- Financing and capital issues related to energy mix projects (47%)
- Identifying and accessing government grants and incentives (40%)
- Assessing and selecting technologies (39%)
- Measuring or tracking progress in meeting strategy objectives (37%).
Energy strategy objectives – respondent comments
“To see how energy costs will develop over the next two to three years and to ensure high level of [energy] security.”
“First, to reduce energy use; second, to increase the usage of renewable energy.”
“To phase out older technology and equipment, replacing it with it more energy-efficient equipment.”
“To help us achieve three targets: to reduce energy consumption by 15%, to reduce greenhouse gases by 20%, and to increase renewable energy mix by 5%.”
C-suite input and oversight
Energy mix is a truly strategic issue for the world’s largest corporations and as a result receives high-level executive attention.
- For 36% of respondents, the CEO is the final decision-maker
- For 40%, energy mix strategy is decided by the COO, CFO, GM or board chairman.
Company energy self-generation
A number of large, well-known corporations have launched initiatives to generate their own energy for a number of reasons, such as reducing energy price volatility, increasing security of supply, decreasing costs, or meeting carbon objectives. These include IKEA, Google, Toyota, Toshiba, Hertz, FedEx, AT&T, BMW, Renault, VW, Audi and PepsiCo. VW, for example, is investing €1b in offshore wind to meet renewable energy objectives and provide a natural hedge against volatile energy prices.
Our survey suggests this practice is not yet widespread, but is likely to increase. 51% of respondents report no self-generation and only 20% generate more than 10% of their energy needs. A third though expect to meet a bigger share of these needs this way over the next five years.
Key barriers – return and risk concerns
The leading reason for not investing in self-generation is that the payback period is too long, with financial return and risk concerns also highlighted.
Factors like upfront investment, a company’s level of experience with energy projects, site availability and technology readiness are relatively unimportant, which suggests that the right financial models could unlock corporate investment in energy generation.
Reducing energy costs remains the main objective of energy efficiency initiatives. However, important secondary aims include shrinking a company’s carbon footprint, limiting exposure to fluctuating fossil fuel prices and reducing risk related to fossil fuel availability.
The most important methods of achieving energy efficiency objectives are:
- energy demand management (47%)
- building energy management systems (20%)
- energy efficiency lighting (18%)
- building automation (18%).
The majority of respondents anticipate increasing energy efficiency over the next five years; 60% say initiatives to reduce energy consumption through efficiency will increase, and 22% say these initiatives will increase significantly.
Renewable energy use
Our survey looked at renewable energy use from two perspectives: energy generated by company-owned or controlled assets, and energy bought from outside parties. From either perspective, we found renewable energy usage among large corporations set to increase from an already substantial base over the next five years.
Renewables in company energy self-generation
41% of respondents report generating some form of renewable energy with company-owned or controlled resources. Most of these generate power with photovoltaic solar (25%), followed by biomass/biogas generation (20%) and the use of biofuels in company-owned fleets (19%). Wind and geothermal have 7% uptake.
Renewable energy still makes up a relatively small proportion of company generation though. Only 11% of respondents say it accounts for more than 5% of their total energy production.
This looks set to change though:
- 51% of respondents say company-owned renewable generation would increase over the next five years.
- 16% expect it to increase significantly.
Renewables in purchased electricity
In contrast, 68% purchase some electricity generated from renewable sources. In terms of total consumption, this divides into those who consume a little renewable electricity and those who consume a lot.
Pricing remains a key factor in renewable energy adoption. Only 39% say they would be willing to pay a premium for renewables, highlighting the importance of achieving grid parity and developing innovative project financing models.
Nonetheless, respondents predict growing use of renewables over the next five years; 46% say theirs will increase and 9% say it will increase significantly.
As a significant (and rising) share of operating costs go on energy, energy mix has become a strategic issue at the C-suite level of billion-dollar corporations.
While reducing energy costs through efficiency is often a strategy’s main objective, a number of other goals also exist, like energy security, carbon reduction and price stability. Regulatory compliance and reputational and brand aspects also play a part.
Self-generation of energy and integration of renewables have been adopted at significant rates to meet these ends, with adoption set to increase over the next five years. The main barriers to this are related to risk and financial return, suggesting adoption could come even faster with financing innovations and increased cost-competitiveness of renewables.
Only those corporations with a strong, diverse energy strategy will create a competitive advantage in today’s more resource-efficient, low-carbon economy.