Managing Energy Managing Risk
By Greg Zimmerman, Executive Editor March 2008 - Energy Efficiency
First, the bad news: Energy prices are as volatile as ever. Unstable geopolitics constantly threatens energy supplies. And partisan infighting has meant that most federal legislative efforts to move toward energy independence have ended up as watered-down shadows of what was originally intended.
Now, the good news — relatively speaking: Those reasons, as well as concerns over climate change and the perceived PR value of going green, mean that energy management has forced its way into the C-suite. Many corporate executives finally understand the criticality of planning now for an uncertain energy future and realize that energy management and risk management are linked. Energy has moved from a boiler room issue to a boardroom priority.
“Our ideal view of the future is that every CEO and senior executive includes energy as a core consideration in their businesses,” says Elizabeth Dutrow, a program manager with EPA’s ENERGY STAR program. “By implementing energy management strategies, companies will be better suited to weather the energy future.”
To help companies learn how to begin planning, ENERGY STAR partnered with a scenario-planning and business strategy consulting firm called the Global Business Network. The organizations convened workshops with top corporate and facility executives from more than 20 companies. The result was a report titled, “Energy Strategy for the Road Ahead: Scenario Thinking for Business Executives and Corporate Boards.”
The report lays out four future energy scenarios (see “Predicting the Future: Four Energy Scenarios,” page 28) and then identifies the basic strategies that can help organizations implement plans and contingencies. The idea is to lead corporations to energy management goals so that they can protect themselves from the uncertain energy future. Several facility executives from leading companies like HSBC, Merck, and Jones Lang LaSalle took part in the meetings that led to the report. Their strategies and stories amount to a laundry list of best practices for getting a head start on the challenges all companies are likely to face.
Energy Management: An Ongoing Commitment
The No. 1 piece of advice for facility executives who are only starting to grapple with the energy-management challenge is simply to improve continuously. That may seem like common sense, but it’s an important first goal, say facility executives who have already implemented sophisticated energy management plans.
“Many companies are just beginning energy programs,” says Dutrow. “Many companies are very new to this.”
There are two facets to the overarching goal of continuous improvement. One is to keep energy management a priority so that continuous improvement is possible. The second is to set numeric goals and develop and maintain a system to quantify results so that improvement can be verified.
Keeping energy as a priority means attaching energy management to other important goals of the organization. Often, this means illustrating how a corporation’s energy management goals are helping to combat climate change.
One shining example of an organization that has taken the importance of mitigating climate change to heart is financial giant HSBC.
“Energy efficiency has been our single largest sustainability priority,” says John Beckinghausen, director, sustainable development and operations. “In 2004, the chairman of HSBC set a goal to become globally carbon neutral. It fell largely to corporate real estate to achieve this because the first key tenet of carbon neutrality is energy efficiency.”
So for Beckinghausen, as for any facility executives who receive mandates from above, energy management is set as a priority.
But, even so, as Beckinghausen says, it’s important to keep the company’s eyes on the prize: “It’s easy for business and building management to be distracted by normal day-to-day operational challenges rather than to anticipate that our traditional forms of energy for powering our buildings might become unaffordable, or worse, unavailable.”
Getting employees on board with corporate energy management goals is just as important. That’s because the more people in the organization that dedicate themselves to the company’s energy goals, the more likely it is that those goals will be achieved.
At Merck, a global pharmaceutical company, employees are actually included in energy management strategies. “All employees are responsible for reducing energy use,” says Robert Colucci, senior director of global energy planning and management. “Our energy policy includes directives that all business activities and employees must comply with.”
For facility executives who still have to push a bit to get employees and corporate executives to see the light, setting specific energy management goals for continuous improvement is the key.
“Push for strong energy efficiency with aggressive goals and targets,” says Dutrow. “Lots of times the CEO will add to those targets — be 2 percent more efficient, more example.”
More often than not, however, truly getting upper management in lock-step with energy management goals means convincing them to think about energy in a different way.
“Get them to see energy as a very large, but controllable line-item expense,” says Gary Graham, vice president of the Energy Services Group for Jones Lang LaSalle. “It should not be treated as a fixed expense. Energy is a manageable item.”
Energy management goals can take many forms — an escalating reduction in overall energy use, buying or generating a certain percentage of energy from renewable sources, or reducing carbon emissions by a certain percentage measured against some pre-established baseline. Once the goals are set, facility executives have to ensure that they have the resources to complete their mission.
An example of this is the Merck global energy team, which Colucci heads up. “The team is an effort to coordinate energy-demand reduction and supply-side strategies, and create and share best practices across the entire organization,” says Colucci. “Reducing demand acts as a hedge against rising energy prices or an energy shortage.”
Merck, ENERGY STAR Partner of the Year in 2006 and 2007, is also a member of EPA’s Climate Leaders, a voluntary organization that works with companies to set goals and implement greenhouse gas emission reduction strategies. While Merck is currently still developing its specific greenhouse gas reduction targets, it has set an aggressive goal of a 25 percent reduction in energy intensity in 2008 from a 2004 baseline.
“Energy management is the most important but most underutilized way to protect the climate,” says Dutrow. “Goals are important because you have to have a framework to think about the future and develop policy robust enough to make a difference.”
Finally, with goals in place, and resources at the ready, facility executives should identify the specific strategies that will move them toward their goals. LEED and ENERGY STAR for Buildings are examples of these strategies; so is adjusting facility design and construction specifications to always include a cool roof or a specific benchmark for HVAC efficiency.
Another important strategy, in terms of both risk management and reducing emissions, is using renewable energy. “The place where energy management can become a risk management strategy is to incorporate alternative energy,” says Beckinghausen. “We have to encourage greater development of the renewable market.”
Colucci agrees: “One way to deal with the uncertain energy future is by concentrating on renewables, specifically onsite solar or wind generation. Clearly, renewable energy is part of our energy future.”
For many organizations, merely looking at renewable energy options would represent a branching out from traditional strategies. But according to “Energy Strategy for the Road Ahead,” looking beyond the tried-and-true ways that business has been conducted is essential to making an organization resilient against whatever the uncertain energy future will bring.
A primary example of this is looking up and down an organization’s supply chain to determine how customers and vendors use energy in their own businesses. Some facility executives are already evaluating building products based on the environmental impact of their manufacturing processes and also what is done with them at the end of their useful lives. But considering supply chain through the lens of energy management means that facility executives should examine the energy use of all suppliers to the company.
Why is this important? As one example: Energy inefficient Company Y supplies a widget critical to the manufacture of the product Company X makes. If Company Y suddenly goes out of business because energy prices rise dramatically, how long will it take Company X to find another suitable supplier for that widget? What will be the impact on Company X’s sales? Will Company X lose customers?
An extreme example, to be sure, but in reality the more energy a supplier uses, the more its products will cost when energy prices rise. Besides, if a company has made a commitment to energy management, finding partners that have similar goals — in essence, a similar corporate culture — is virtually a no-brainer.
“It’s important to look upstream at suppliers and make sure that the energy embedded in their products and services is as low as possible,” says Dutrow. “You do pay for their energy waste.”
Merck is one company that is already using energy as a criterion for selecting suppliers. “We’ve recently established a supply chain network,” says Colucci. “We’ve created terms and conditions by which products are manufactured. Energy is becoming a larger and larger component of costs.”
The other component of considering energy in supply chain management is looking downstream. Potential customers with similar energy goals may look more favorably upon a company that has shielded itself against an uncertain energy future.
“Inform customers of the value of your energy strategies,” says Dutrow. “This means that they are exposed to less risk.”
One of the intentions of the “Energy Strategy for the Road Ahead” report was to act as a way to frame the discussion about the importance of proactive planning to suppliers, skeptics in the organization and even customers.
“It’s a tremendous communication tool to work with our customers to get them to think about energy the way leading companies are,” says Jones Lang LaSalle’s Graham. “A number of clients are facing the question of what to do about energy and sustainability. They don’t know where to start.”
Essentially, Jones Lang LaSalle has used energy management as a business development opportunity. And they’re not alone.
“Energy is a big transformational opportunity,” says Dutrow. “Commercial businesses are looking at opportunities to expand from their core business. Energy is a lever for positive growth and change for the future. It’s up to executives to think beyond the obvious nature of their business.”
What They Learned
“Energy Strategy for the Road Ahead” was developed by executives from organizations with a lot of experience in energy management. But even those executives found that the process of developing the report led them to look at their businesses in new ways and identify additional energy management opportunities.
“We learned how to do scenario-based thinking,” Beckinghausen says. “It’s a way to prepare for the unexpected ‘what-ifs’ that can occur in our business operations. The meetings caused me to look more specifically at market conditions based on geopolitics, climatic conditions and other factors. Doing so forces us to make interesting choices we wouldn’t have otherwise made.”
In fact, energy-scenario-based planning, in general, may be a new concept for facility executives. Because many facility executives have backgrounds in the precise sciences of architecture or engineering, it may be somewhat uncomfortable to deal in unknowns and “what ifs.” And it doesn’t help that the energy future is so unclear.
“Each of the scenarios in ‘Energy Strategy for the Road Ahead’ is equally possible,” says Dutrow. “And each presents challenges with equal difficulty.”
But in regards to energy, scenario-planning is an absolutely essential skill and one that facility executives would do well to learn. It’s the first step toward instituting an energy management plan powerful enough to mitigate the risk of the uncertain energy future. The good news is that the boardroom is listening.
Carbon Neutral at HSBC
In late 2004, the Group Chairman of London-based HSBC declared that the corporation, with more than 10,000 banks in 83 countries, would be carbon neutral. For HSBC’s North American operations, the task of completing that massive directive fell partly upon the shoulders of John Beckinghausen.
Beckinghausen, the company’s North America director of sustainable development and operations for corporate real estate, identified three strategies. First and foremost, the company concentrates on energy efficiency — no small feat for a multinational corporation that relies on its energy-intensive data centers. “Data centers are our lifeblood as a financial institution,” says Beckinghausen. “We took a close, hard look at building, fit-out and operations of all our data centers.”
The company has instituted a Six Sigma project to identify further energy opportunities and has committed to ensuring that all new corporate office space would be LEED-certified. Between 2005 and 2007, HSBC reduced the energy intensity for its U.S. buildings to below 2004 levels.
The second leg of the stool is using renewable energy, whether from onsite generation or with the purchase of renewable energy certificates (RECs). Currently, the company gets about 35 percent of its total energy from non-greenhouse gas-emitting renewable sources.
Finally, the company offsets the remainder of its carbon footprint by purchasing carbon offsets, trading carbon credits in global markets and supporting carbon-reduction projects around the world, such as landfill methane-gas capture.
The company declared itself carbon neutral in late 2005 and, for this reason, won the Climate Protection award from the U.S. EPA in 2007.
At first, the company’s carbon neutrality was based largely on the purchased offsets, though as time goes on and more energy efficiency projects come on line, fewer offsets will be needed. The bank estimates the cost of carbon neutrality was $7 million in that first year and less in subsequent years.
That cost is an investment in the health of both the company and the planet, Beckinghausen says. The company believes that carbon neutrality makes economic sense because it helps to insulate it against potential financial consequences of an uncertain energy future. It also gives the company an edge among customers increasingly interested in the green credentials of companies with which they do business.
“The argument for carbon neutrality does involve considerations of the economics of such a decision,” says Beckinghausen. “But the good of the Earth, its eco-systems and climate stability are resonating more in the boardroom as well.”
— Greg Zimmerman