Energy Management How the FD can make a difference A FinancialDirector and publication
Introduction In the current economic climate, controlling costs is a key priority for businesses of all sectors and sizes. e economy is coming out of recession, access to finance is tough and cash-flow is constrained. Utility contracts are a large part of these costs, accounting for up to a fifth of the average business overheads. e energy market is also volatile and there is an increasing amount of complex regulation on the horizon that businesses need to budget for and comply with. If not managed properly, energy costs can be a headache at a time when every penny counts. However if businesses are prepared to seize the initiative and transform their approach to managing their energy, these threats can be turned into a commercial opportunity both in terms of reducing costs and creating a competitive advantage. Businesses should start to view energy spend in the round. Instead of purely considering price when choosing an energy contract, they should look more holistically at a services package that will help them reduce their consumption and costs. is may start with the installation of a smart meter combined with technology that will allow them to identify savings and change behaviour within their organisation. However it can go as far as visits from energy experts, energy audits and redevelopment of property to make it more energy efficient. is supplement seeks to understand where the business community is on this energy management journey, through the eyes of more than 200 finance directors. As you will read in the coming pages it s evident that the majority of businesses are not prioritising energy efficiency as a mechanism for cutting costs as they are not fully aware of the potential savings and competitive advantage that can be gained by doing so. From working with over 650,000 business and public sector customers at British Gas Business we know that some simple energy efficiency measures can help save businesses at least 10 percent on their costs. ose that go a step further, and make energy efficiency a business priority that is discussed at the top table level can achieve savings of 20-30 percent. We re moving into a world where controlling energy use is a management tool starting with energy efficiency, and moving into opportunities to generate revenue from assets businesses already own. ose that recognise this first will be the best prepared to thrive in the long-term. Nick Grant, Director of Corporate Markets and Energy Services, British Gas Business Nick Grant, Director of Corporate Markets and Energy Services, British Gas Business This publication has been produced for British Gas Business by Incisive Media 32-34 Broadwick Street London W1A 2HG Tel: 020 7316 9000 2 Energy Management March 2011
From backroom discussion to boardroom decision For finance directors, the twin issues of energy use and cost are set to rise up the agenda during 2011 There is little doubt that finance directors will find themselves playing a critical role in steering their organisations through the next 12 months. Recent data from numerous sources including the ONS and CBI demonstrate that the economic recovery is fragile as consumer confidence remains brittle, the threat of rising inflation looms large and growth prospects muted. Businesses face tough conditions in the weeks and months to come. is is compounded by increasing financial and regulatory pressure for businesses to manage their energy more efficiently. is is front of mind for the coalition government, with energy secretary Chris Huhne recently saying that UK energy suppliers and their customers need to manage supply and demand in smarter ways to decarbonise electricity, and that means using all of the technologies in our tool box. He emphasised that it is not all about quantity of supply, stating it s as much about using demand management, storage and interconnection to balance our system, in particular at peak times of the day. Against this backdrop, financial directors will need to balance a wide range of competing demands for their time and attention. at is not surprising given the scope of their role in the modern business. Top of the agenda for many will be effectively managing various costs and driving efficiencies throughout their operations. It is to gain a better understanding of their priorities, their challenges, as well as the opportunities for achieving these aims that we have partnered with British Gas Business the largest Energy Management March 2011 3
How confident do you feel about your organisation s ability to manage these priorities in the next 12 months? 200% 150% 100% 50% 0% Security of funding Headcount issues Sourcing investment opportunities Streamlining supply chain Improving energy use and efficiency Complying with relevant regulations Improving operational efficiencies provider of energy and energy services to UK businesses for this in-depth survey of UK FDs. More specifically, the survey seeks to illustrate how some FDs are beginning to consider managing their energy spend more effectively for the longterm, and to understand what benefits this approach delivers. e findings suggest that almost a third (31%) consider improving energy use and efficiency to be a key priority for managing their organisation in the next 12 months ahead of streamlining their supply chain (20%) and sourcing investment opportunities (16%). ose that approach energy use in this way and treat it as more than a cost realise it can become a source of competitive advantage or even of revenue generation. Very confident Confident Neither confident nor unconfident Unconfident Very unconfident Which of the following costs do you feel best able to manage in 2011? * Respondents could select more than one answer Current challenges and priorities Most FDs will recognise the portrayal of themselves as all-rounders with responsibility for a whole range of functions. Beyond core finance and accountancy, the modern FD will most likely be accountable for IT spend, supply chain, logistics, compliance and health and safety. When it comes to rating their confidence in handling these numerous challenges, the findings demonstrate that FDs are most comfortable with their core financial duties, with 57% counting themselves very confident in dealing with funding issues for example. However, in respect of managing energy costs, a different picture emerges. Just 23% of FDs feel able to manage their energy costs in 2011. is is some way behind confidence in their abilities to manage other cost centres including staffing (84%), suppliers (41%) and equipment (37%). Despite greater awareness of the importance of effective energy management, it would appear that FDs are still struggling to come to terms with the specifics of what this requires. Equally, they ve not yet fully grasped the opportunities available to them from successful energy management ranging from effective procurement through to adopting a longterm and holistic energy management strategy. Currently, the survey suggests that too much decision making is based on short-term margin savings. FDs need the right support and advice from their provider to move them towards a more holistic approach which encapsulates long term changes in behaviour as well as investment. e fact that a smart meter and simple energy efficiency measures alone can save a business up to 10% on their costs, whereas focusing on price is a 1% savings decision, is strong evidence of the value of such an approach. 100% 80% 60% 40% 20% 0% Energy Staff costs Suppliers Equipment Buildings/ property Commodity and input devices Other Looking at energy use in the round e research brings to life the challenge FDs face in getting their businesses to view energy usage as a management tool and to adopt a longer-term approach. e issue of energy management, cost and efficiency is currently not discussed at board level as regularly as it might be given the proportion of a business' overheads it can account for. Currently, 41% of FDs say it s only very occasionally discussed at board meetings, with one in four (25%) saying it s hardly ever discussed. As a result, the focus that organisations typically adopt in relation to the issue tends to revolve around cost. However, costs are the result of market movements and therefore outside of the direct control of companies. In short, the energy market in the short-term is unlikely to offer FDs a clear and stable cost level, as Nick Grant, Director of Corporate Markets and Energy Services, British Gas Business points out: 4 Energy Management March 2011
One issue is around the fact that prices have been volatile for a while, he says. In 2008/09 there was a brutal and quick increase followed by a sharp decline. at s partly on the back of the oil price, and that always creates pressure for customers to cut their bill. Given that the landscape of the energy market is subject to continual change, volatility in the market is not going away. Focusing on energy cost in this way however, is to concentrate on just one half of the equation. Arguably more important is for financial directors and their businesses to view energy spend in the round. Cost cutting can deliver significant benefits initially; other approaches can deliver greater impacts over the long-term. e biggest mistake is when companies concentrate on the pounds and pennies of the contract up front says Grant. At the initial negotiation stage, they opt for the lowest management fee rather than what they can achieve or receive through the life of the contract. e survey identifies FDs appetite to benefit from savings, with more than a third (35%) agreeing that their business is unclear what level of potential savings these represent. For this to happen, energy management must rise up the corporate agenda and command more of the FD s and senior leadership team s attention. Equally, businesses must find the right partner to help them reduce their usage and costs at a competitive price and to enable their senior management team to treat energy use as a management tool and even a source of competitive advantage. Taking the longer-term view: spelling out a clear vision As the findings suggest, more needs to be done to build a better business case for adopting long-term strategies for managing consumption and reducing expenditure on energy use. Two thirds of respondents (65%) agree that their organisation needs to focus more on their long-term energy use and costs, rather than monthly bills. Another third (31%) agree that the business case for energy management has not been sufficiently made within their organisation. Yet, given the wide range of competing issues FDs have to balance, how can they dedicate the time, energy and ingenuity necessary to manage their businesses consumption of and expenditure on energy? e answer is for finance directors to work with their energy provider to take a longer-term view by setting and then executing a strategy for energy supply and efficiency optimisation. e first step involves establishing how their business can optimise its energy supply through Do you agree with the below statements? 200% 150% 100% 50% 0% I know exactly how much my energy bill is I would like to have a better grasp of why our bill costs what it does We need help identifying options for reducing our monthly energy bill As an organisation, we need to be more focused on our monthly energy bills As an organisation, we need to focus more on our longterm energy use and costs choosing the right contract for its specific business needs. is means scoping out their organisation s energy requirements and creating an effective procurement strategy. As Grant explains: FDs should approach buying energy by looking at their contract and asking themselves questions such as what are our objectives?, what product do I want?, what risk level am I happy with? and what service levels do I expect? is also entails considerations of risk, such as whether they want certainty of cost or whether they want to take advantage of price movements in the markets. Working in partnership with an energy What do you think will be the most effective method of delivering energy efficiency and energy management information to businesses? 36.4% 17.6% 4.7% Agree 12.2% 29.1% Don t agree * Respondents could select more than one answer Visual updates via an online dashboard Face-to-face meeting with my account manager The traditional paper bill An online bill Other Energy Management March 2011 5
What do you see as the greatest challenges for your organisation in managing and controlling your energy use? 40% 30% 20% 10% 0% Our business takes a short-termism approach to this issue Lack of understanding amongst key personnel Lack of visibility of data and information Not considered as a priority by management Keeping up with legislative developments provider can help businesses identify what their primary energy procurement objective is. e second step entails businesses working in partnership with their energy provider to assess and optimise their energy consumption in order to generate energy savings through more efficient energy management. is requires setting targets for energy savings in the short, medium and longterm and identifying the strategies that will ensure they achieve these targets. e role of the energy supplier has evolved over time to accommodate both setting and acting on these objectives. Far from simply keeping the lights on, the right provider can now play the role of a trusted adviser helping businesses map out a clear energy procurement and management plan. is is something British Gas Business does for thousands of customers, across public and a variety of private sector industries. British Gas Business is therefore well placed to meet the growing needs and requirements that FDs have of their energy provider ranging from reducing consumption (37%), offering a broader scope of services such as energy management (30%) to expertise in monitoring and managing infrastructure (21%). A smart future based on genuine insights Crucial to a business achieving its energy objective, according to Nick Grant, is effective use of smart metering technology. Comprised of sophisticated Lack of value add from our suppliers/partners An approach to procurement that is disjointed and doesn t achieve best value for money Other digital metering equipment, smart meters are capable of sending accurate readings automatically at monthly, daily, hourly or even half-hourly intervals to help establish usage patterns and identify potential cuts. is also puts an end to estimated bills and allows companies to see what their consumption is so they can plan more accurately. British Gas Business has installed over 110,000 smart meters in business customers premises across the UK. e data they provide gives our customers detailed insights that can help them manage their costs, effect behaviour change in staff and support their business plans and growth strategies, says Grant. e data provided from smart meters also provides a valuable source of management information, which customers can access via an online management tool. e tool enables the user to analyse energy consumption, compare usage across different sites, spot usage patterns and predict future trends. However installing a smart meter is just the beginning of the energy efficiency journey and further steps can be taken to generate bigger returns. For instance, British Gas Business Energy Services helps its customers comply with legislation and offers energy audits and healthchecks to identify further measures to cut usage. It can also redevelop a business property to make it more energy efficient and offer an in-house energy expert for those with a significant energy spend. As Grant explains: For our customers who have set clear objectives, our Energy360 team are helping them to get the most out of their energy strategies from understanding their current challenges and legislative issues like the CRC, to how best to measure, monitor and manage their usage and invest in the most effective microgen technologies and services that provide even greater cost savings. e survey gives a good indication of the potential of businesses looking at their energy strategy in terms of optimising supply and efficiency. More than one in ten (12%) of businesses surveyed currently have smart meters and a large section of respondents are now demanding realtime, online energy usage information in order to make rapid and accurate decisions on energy spend. ere is still some way to go however. Almost one in five (19%) respondents admitted they would like help to better understand the detail of their monthly fuel bill but only 33 per cent of respondents say they are planning to install the meters. is is despite the fact that by 2014 there will be a mandatory requirement for every business to have a smart meter. More urgency in take up is needed if the true benefits of smart are to be realised. Encouragingly however, large numbers of respondents identified the positive potential that 6 Energy Management March 2011
Case study: Energy360 helps Thatcham save 20,000 on energy costs Helping a business save energy is one thing, but helping it do so without impacting on cash flow is another. To do so requires an unparalleled knowledge of the energy industry. But it is the experience and expertise of British Gas Business' Energy360 team that sets it apart and helped Thatcham save 20,000 on its energy costs. The beginning of the road Thatcham provides a unique range of products and services to the insurance and motor repair industries to help improve safety and security. It conducts research targeted at reducing the cost of motor insurance claims while maintaining safety and quality standards. Thatcham s goal was straightforward: it wanted to reduce its carbon footprint, generate green energy on site and still have a reasonable financial payback period. Finding that solution would not be easy, so it called on Energy360 for help. Energy360 set to work on a solution, first performing a detailed site survey at all five of the buildings within the Thatcham site. Conducting the surveys was not simple as Thatcham uses sensitive electronic equipment, so care was needed to avoid disrupting its day-to-day operations. Once completed, Energy360 was able to use the survey s results to identify a range of measures that would reduce the energy consumed by the five buildings. It were able to calculate that the potential energy savings across the five sites would support a small amount of green energy generation while keeping the payback period within five years. An environmental and financial success To help Thatcham reach its goal, Energy360 was able to secure an interestfree loan from the Carbon Trust under the Energy Efficiency Loan Scheme. The money was used to install eight micro wind turbines as part of a hybridised solution, including voltage management. This enabled Thatcham the means to generate green energy while also becoming energy efficient. These changes have already led to some very tangible energy savings. The Thatcham site now uses more than 250,000kW hours less per year, a total of 110 tonnes of CO2 emissions per year. In addition, there are the financial benefits that the changes delivered. Thatcham now pays 20,000 less a year for its energy. Thatcham was also rewarded with a project payback estimate of less than three years a figure well below the Carbon Trust s fiveyear limit for smaller businesses to qualify for an interest-free loan. So not only will the system pay for itself in less than four years, but with the support of the Carbon Trust loan it has been installed with no impact on cash flow or borrowing costs. The people at Energy360 advised us on the solution they felt best for the job, says Thatcham s Ian Lewis. They instilled confidence within us that not only would they ensure we would make considerable carbon emission savings, we d do it in a financially amicable way. Not once were we ever unsure that Energy360 would take us to where we wanted to go. And the results speak for themselves. www.energy360.co.uk smart technology can have in improving business operations. irty per cent of FDs identify the potential of smart meters to bring down their energy bill and a further 20 per cent say smart meters could provide them with insight into their energy use and help them manage their business operations better. Helping businesses manage their energy better So what does this all add up to? Ultimately, rather than simply being another business cost for the FD to concern themselves with, energy management offers the FD the chance to truly demonstrate a central role in pushing for value for the business. But simply looking to reduce costs is only the beginning of the story. Businesses need to realise they can gain a genuine competitive advantage by looking beyond short term savings and rethinking the way they consume, measure and buy their energy. Indeed, with Government schemes like the Feed In Tariff for solar panels, and the upcoming Renewable Heat Incentive, businesses have a real opportunity to use government support to invest in their own energy generation, and potentially sell back any energy not used into the electricity grid. e emerging trends from the FD / AA research suggest that a growing number of FDs are taking this issue seriously, looking to make it a boardlevel discussion point and devoting more time and effort to its management. It is clear that controlling energy use can deliver fundamental and sustainable benefits to their business. ere has never been a better time to do so. Energy Management March 2011 7