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Why energy matters to CFOs

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  • Introduction

    Prioritizing energy

    Since 2000, global energy prices have soared 260%. Scarcity of resources, geopolitical situations around the globe and extreme weather events have all contributed to the increase.

    That steep rise in cost, and its pressure on the bottom line, is obviously the primary reason that energy should be on the CFO's agenda, however, the topic goes far beyond budgets. It also has deep implications for strategy, sustainability, supply chain, tax and more.

    Energy and the CFO's agenda

    EY - Energy and the CFO's agenda

    Energy must be on the CFO's agenda as it is a fundamental driver of the economy. [See a transcript of this video]

    A changing energy sector

    The pace of innovation in the energy space over the last decade has been seismic. Sources, management technologies and financing solutions have all been affected.

    Simultaneously, there has been a paradigm shift, as the world focuses on reducing its carbon footprint and becoming resource efficient.

    The CFO who fails to take these transformations into account will put their company at a competitive disadvantage.

    The company that uses energy wisely can strengthen a brand, build consumer equity and help contribute to building a better working world.

  • Diversifying the energy mix

    The days of total reliance on the grid are over.

    Depending on one source can be detrimental in the wake of a major weather event. Renewable energy, for example, allows companies to generate their power onsite or supplement their supply.

    CFOs need to make sure their companies maximize optionality. The higher the optionality, or the ability to switch between energy sources, the more responsive a company can be – that nimbleness can mean savings.

    Exploring optionality

    EY - Exploring optionality

    The ability to switch between sources of energy, in response to market changes, allows a company to be flexible. [See a transcript of this video]

    Finding the right balance

    Companies can reap financial benefits by being strategic about:

    • The sources of energy
    • How energy is procured
    • How the business consumes the resource

    Exploring renewables

    Renewable energy and smart energy solutions have become essential elements in the strategy toolbox.

    Renewables present options that are financially advantageous. For example, the cost of solar and wind energy – which has dramatically decreased in the last five years – is highly predictable.

    There is only one capital cost. Sun and wind are free.

    In a growing number of markets, renewable energy can be less expensive than conventional sources.

    For example, companies in emerging markets may not have easy access to the grid, making renewable energy their best option. And for any company choosing onsite and company-owned renewable generation, it can help manufacturers avoid costly black-outs and brown-outs.

    Renewables can help mitigate energy risk in several ways:

    • Improves the predictability of prices
    • Improves energy resilience, by creating a portfolio of alternatives
    • Enhances reputation and brand by achieving sustainability objectives
    • Increases potential to avoid long-term carbon and environmental penalties by complying with current and future regulations

    In the US, 40% of all new generating capacity added last year was renewable. Globally, the figure was 56%, as renewables eclipsed fossil fuels.

    But companies are not choosing renewables over conventional energy sources. They are employing the complementary characteristics of both to optimize their energy spend and energy risk profile.

  • Sector view

    Some sectors are quickly adopting renewables. Here, we look at developments in mining and metals and oil and gas.

    Sector view: Mining and metals

    Escalating energy costs in remote locations are prompting mining and metals to shift from conventional energy. And as projects move further into frontier markets, off-grid power solutions are required.

    Renewables play a part in allowing the industry to maintain their social license to operate. Mining and metals companies are among the largest generators of carbon, leaving them open to scrutiny by environmentalists and others – so action is required.

    Listen to Mike Elliott, EY Global Mining & Metals LeaderListen to Mike Elliott, EY Global Mining & Metals Leader, discuss why energy should be top of mind for CFOs in the mining sector (and beyond).

    Mining is an energy intensive industry and energy access is becoming increasingly difficult and expensive in many regions of the world. Falling grades require more energy to extract each tonne of mineral. Miners are grappling with these increasing costs while commodity prices tighten. In addition, miners are having to compete with both governments and communities for these scarce resources. This has prompted the need for alternative power solutions.

    Renewables will play an increasing role in the industry going forward as it will:

    • Help companies achieve energy security
    • Enhance reputation and brand by meeting the sustainability expectations of customers, investors and other stakeholders
    • Fulfil energy needs in remote locations
    • Become more cost effective

    These are key triggers for change for CFOs who are looking to preserve both profitability and social license to operate.

    Sector view: Oil and gas

    The US is experiencing a renaissance in oil and gas, as natural gas takes precedence. A few years ago, the country was seen as a producer with a declining resource base.

    Now, it is one of the top natural gas producers in the world. And it could soon catch up with Middle Eastern producers.

    This is not a one-time event in which the US is able to provide some additional supply. This is a shift that is changing the global dynamics of supply and demand within the energy sector.

    It will influence relationships between companies and have wide-ranging geopolitical implications.

    CFOs need to be keenly aware of ways in which they can shift their energy needs to natural gas. Over the long term, it is a more reliable source and offers options for the components of products to the method in which products are delivered.

    It is a flex fuel, because it is a feedstock for many chemicals used to produce products. Plants also can burn it to provide low-cost power.

  • The tax implications of energy

    A note to all CFOs: tax and policy changes in the energy sector will influence your business. Period.

    Generally speaking, energy tax provisions will naturally have the biggest impact on energy companies. However, changes in energy policy impacts all businesses.

    As the US looks for major tax reform in the next three to five years, three areas will have the broadest impact:

    Capital cost recovery:

    Energy companies in the US currently expense a large portion of their costs as intangible drilling and development costs. A change from expensing to amortization would increase the cost of capital significantly. Less drilling, lower supply mean higher energy costs.

    International tax system:

    A territorial versus worldwide system of taxation influences where companies place their money, how they invest it and where the return is made.

    Cap and trade system:

    All businesses are carbon emitters. The U.S. Environmental Protection Agency’s limits could affect the cost of power.

    Companies that maximize optionality for energy use and generation stand to gain from tax credits. Those credits are multijurisdictional, from research and development to renewable energy and power generation.

    To help navigate the implications, effective CFOs recognize the importance of their tax department. They do not view tax as a cost center for compliance, but rather as a key component in all their planning, especially when it comes to energy.

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