Energy management is now seen as a boardroom concern by 89 per cent of the UK’s manufacturing companies, with 79 per cent calling it “critical” to their business. These are findings from a study published by diversified industrial firm Siemens this month. Six hundred senior decision-makers in the manufacturing industry fed into the report, which also questioned respondents on their 12-month and five-year strategies to combat energy concerns.
The report highlighted two key issues. First, manufacturers are struggling to formulate longer-term strategies for mitigating the risks posed by energy costs and security and supply: while 70 per cent have a clear idea of what they will be doing in 12 months, only 50 per cent had a five-year plan.
Second, manufacturers are finding it difficult to predict returns on and justify investment in energy efficiency enablers.
These findings hold important messages for the utilities sector and provoke concern about Britain’s wider economic outlook.
The manufacturing sector has been earmarked by government as a critical element in its plan to rebalance and reinvigorate Britain’s economy. Since the 2011 budget, when chancellor George Osborne proclaimed his ambitious portent of a “march of the makers”, numerous industrial and sector growth strategies have sprung into being and hundreds of millions of pounds have been poured into helping priority sectors to regain resilience and develop competitiveness.
These efforts have met with some success – the manufacturing sector has shown strong growth throughout 2014 – yet investment levels remain stubbornly below pre-recession levels and there is lingering aversion to risk, which frustrates organisations such as manufacturing trade body EEF and business group the CBI.
This situation persists despite government efforts to stimulate investment, including investment in energy efficiency – by enhancing the annual investment allowance, launching the Green Investment Bank and introducing its electricity demand reduction pilot scheme.
However, manufacturers report that fear of poor returns, inability to muster the capital outlay and the distraction of more pressing priorities are holding them back from doing more with energy efficiency.
Why should energy companies care about this? That depends on your view of the role of the energy sector in society and on what constitutes proactive customer care. If you take the view recently expressed by Ben Verwaayen, former CEO 0f Alcatel-Lucent and chairman of the CBI’s energy and climate change board, that energy is “a tool, not a product”, then there is a clear argument for energy companies to focus more on ensuring their tool is used well than on selling packaged portions of it and leaving customers to their own devices. This should have the happy effect of improving customer relationships, lengthening contracts and contributing to the greater good of economic health.
This may sound a little ‘do gooder’ to hard-bitten energy executives, but it’s a view that is shaping the business strategies of many energy firms.
Npower, for instance, launched a quarterly energy briefing in June to help its manufacturing customers keep abreast of developments in energy policy and regulation. Ian Preston, head of direct and technical sales at Npower, said it arose from a growing awareness that manufacturers were struggling to make sense of complex energy market developments. It also goes hand in hand with a campaign to help commercial customers reduce their energy demand.
What’s the catch? There isn’t one, according to Preston. He insists there is a long-term benefit for all involved.
For while reducing demand will result in diminishing bills and profits in the shorter term for Npower, it brings with it a drive towards “high value” energy solutions. These include longer-term, tailored contracts with individual businesses. Npower’s role in arranging a 20-year direct power purchase agreement worth £440 million for BT is an example and Preston is confident it will bring more stability to the energy provider’s business, easing cash flow and reducing risk.
Commenting on the vogue for terms such as “high value” and “holistic” in relation to commercial energy supply, Jeremy Nicholson, director of the Energy Intensive Users Group, cynically observes, “it’s cheaper for suppliers to use words like this than to do anything real on price” – although he swiftly adds that the goodwill is welcome and adding services to contracts is an appropriate way for suppliers to seek differentiation.
Nicholson does suggest, however, that a tendency to offer flexibility and tailoring only to key accounts may be leaving a number of manufacturers out in the cold. “Beneath the layer of very large, energy-intensive companies, there is a big group of mid-sized, often growing companies for whom energy represents an increasing part of their cost base,” he says.
Siemens’ study encompassed companies with between 150 and 10,000 employees, so many respondents will have fallen into this blind spot. It’s likely that the smaller respondents constituted the majority of the 27 per cent who said they do not have a clear idea of their annual energy spend.
“These companies are less likely to have dedicated energy managers and may not have separate metering for individual operations,” says Nicholson. “These are things that suppliers or a third party could bring. There is certainly an opportunity for more service here.”
Some might argue that the prevalent use of brokers for making energy purchasing arrangements among this group would hamper suppliers in getting close enough to access this opportunity, but Nicholson says this need not be the case. “If additional services are valued by a customer then they, if they are wise buyers, will inform their broker only to accept quotes from suppliers with relevant expertise,” he asserts.