According to a report by the Carbon Trust large UK businesses are paying out more than £1.6bn too much on their energy bills every year because many are yet to seize the full opportunity to cut bills by around 15% through energy efficiency measures.
These savings are available through changes in behaviour and equipment and represent highly attractive returns on investment.
Energy Efficiency is Good
Analysis by Carbon Trust Advisory Services has confirmed that energy efficiency is a good financial opportunity for most companies. Their tracking of efficiency implementation by businesses indicates that costs of at least £1.6bn* could be saved by the UK’s large businesses**. And the investment required to seize these savings has very attractive payoffs: on average an internal rate of return (IRR) of 48% and payback within three years is on offer***.
The investments required to save 15% of energy bills have an average IRR of 48%, well above the minimum requirement set by businesses, which averages 11.5%. Up to 94% of businesses have an IRR requirement of under 30%.
Money is being left on the table
The Carbon Trust’s research suggests four key principles are common to companies that are most successful in exploiting energy efficiency opportunities, leaving less money on the table.
Four Key Principles
- Making the case: the true value of energy efficiency is investigated, accurately determined and communicated clearly to secure finance to effect change when other business demands also require expenditure.
- Using organisational culture and behaviour to overcome inertia: organisational culture is aligned to energy efficiency from the boardroom to the grass roots of the organisation.
- Resolving misaligned incentives: innovative ways are found to overcome the split incentives as well as weaknesses in the structure of incentives and objectives within and outside of the business.
- Enhancing the customer proposition: business investment in energy efficiency is aligned with positively impacting the customer experience.
Making The Case
Two perceptions can shunt issues of energy and climate change down the boardroom agenda. The first of these is the perception that energy is not a material business cost, and the second is that energy efficiency offers low investment returns.
Regarding materiality, it is true that energy costs are not the highest costs faced by most businesses; other costs such as salaries and materials are generally bigger, may be more variable, and might be seen as more important to manage.
Energy prices are expected to rise in the next few years, driven by the supply demand balance and regulation around climate change. In fact, Ofgem estimates that energy prices could rise by over 40% in real terms over the next decade in the UK. And tackling energy costs also brings further benefits along in its wake, such as reducing the business risk of energy price shocks; greater staff engagement; and broader reputational benefits relating to external stakeholders.
Businesses that assign value to some or all of these wider impacts are able to incorporate a ‘truer’ price of energy in their operations.
On the question of investment returns, the average IRR of recommendations that the Carbon Trust has made to large businesses is 48%. By way of comparison, when asked to estimate the average IRR of energy efficiency investments, the average response from CFOs in a recent Carbon Trust survey was 19%, less than half the actual rate. And 64% of respondents thought that returns are less than 20%. Reviewing the actual savings opportunities and IRRs from energy reduction investments could bring benefits for many businesses.
Companies that make a clear business case for energy efficiency internally:
- understand their total energy use and cost, now and into the future
- take a broad view of costs and benefits, for instance by assessing customer attrition risks
- assess (or refresh estimates of) realistic efficiency opportunities and their returns taking these broad views into account, and
- ensure that viable investments have access to capital.
Using organisational culture and behaviour to overcome inertia and
tapping into the enthusiasm and problem-solving capabilities of a workforce is essential to align behaviour with a corporate goal to be energy efficient. It can also lead to new ideas emerging.
Like all company-wide efforts at change, the key to unlocking enthusiasm and creating momentum starts with the support and commitment of top management. The stance taken by the leadership of the business is therefore either a benefit or a barrier.
Leadership on energy efficiency is no different from leadership on other business issues: it requires repetition and reinforcement of the message, setting —and owning—challenging objectives, cascading these objectives throughout the business, ‘walking the walk’, and promoting successes and progress. Examples of companies that are visibly leading from the top are Unilever, with its recent announcement from CEO Paul Polman that the company would—amongst other things —halve the environmental impact of its products by 2020;
National Grid, which has an 80% footprint reduction target; and Wal-Mart, where CEO Mike Duke has announced aggressive targets such as eliminating 20 million tons of greenhouse gases from the group’s supply chain by the end of 2015.
Whitbread has incorporated performance measures related to the energy consumption of its hotels and restaurants into its annual bonus scheme for staff. The company has also given its housekeeping teams simple ‘Top tips for going green’ cards with advice on things they can do or look out for and which will make a difference to environmental performance.
The natural competitiveness of individuals can be used to nudge them towards desired outcomes. The Capita Group Plc developed a league table that ranks each of its sites based on their performance in carbon reduction.
Telling site managers how they are doing relative to their peers and their own past performance creates a desire to act and is highly effective at motivating them to work towards energy and carbon reduction targets. Tesco is another company finding that peer comparisons are causing managers and staff to try to better their energy performance versus other stores.
So putting control in the hands of individuals can work. In certain areas, taking control away from them can also work. This doesn’t have to be disempowering: movement and/or daylight sensors on lights do this and are widely accepted. Ladbrokes has gone a step further
and is managing the heating controls in 2,000 stores. A control unit in each store reacts to pre-programmed opening times as well as local conditions so that stores are not being heated when they are not open. Managers have an override (for instance, if they are working outside normal hours) but in the normal course of business they don’t need to worry about temperature controls.
This is helping Ladbrokes reduce their out of hours energy use significantly.
The UK has a substantial cost and energy-saving opportunity that can be realised at attractive rates of return and using reliable techniques and mature technologies. Leading companies are demonstrating how these opportunities can be fully exploited and barriers, such as accessing capital and dealing with misaligned incentives, can be overcome.
CFOs and other business leaders who reset their expectations of value and treat the efficiency challenge as a whole-company change programme should be able to unlock significant hidden value in their businesses.
To find out more about energy efficiency and how much money you might be leaving on the table contact www.energygain.co.uk
* Large businesses have approved projects with an average IRR of 12% in the last year, confirming that a 48% return is very likely to outperform many other business investments.
** Businesses with an annual energy bill in excess of £1m.
*** Based on sample data from the Carbon Trust’s database of energy efficiency projects