Large companies spend millions, or billions, of dollars directly on energy each year—and millions more indirectly, on supply chain, outsourcing, and logistics costs. Yet outside the most energy-intensive industries, the majority of firms approach energy as merely a cost to be managed. This is a strategic mistake that overlooks enormous opportunities to reduce risk, improve resilience, and create new value.
Today energy is climbing up the corporate agenda, due to sweeping environmental, social, and business trends, including climate change and global carbon regulation, increasing pressures on natural resources, rising expectations about corporate environmental performance, innovations in energy technologies and business models, and plummeting renewable energy prices. These megatrends change the context in which businesses operate and open companies up to new risks and new paths to value creation.
In Michael Porter’s classic view of strategy, firms create advantage either by keeping costs low or through differentiation. The choices a company makes about its energy sourcing and consumption can profoundly influence its cost structure. And how it manages the environmental and climate impacts of its energy use—principally carbon emissions—is an increasingly important differentiator for consumers, investors, and corporate customers.
1. Start with a C-Level Mandate
An energy strategy will be hard to implement without explicit engagement from the CEO and a clear governance structure. Laggard companies in our study identified the lack of this organization as their biggest obstacle to progress.
The CEO mandate typically begins with a commitment—within the company, initially—to make energy strategy central to the firm’s mission and competitiveness. The CEO should signal the importance of this commitment by appointing a senior executive to serve as champion and shepherd. In firms where operations and energy footprint are critical, as is the case for industrial and petrochemical manufacturers, the COO may play this role; in companies where energy sourcing and financing are central issues (in the ICT and retail sectors), the CFO may be the right choice.
This executive assembles a cross-functional team to develop the firm’s energy strategy and guide execution. The team should include executives from operations, facilities, finance, legal, procurement, sustainability, and perhaps other functions. Microsoft’s team, which includes members from environment and sustainability, legal, finance, and data center operations, is accountable to the VP for cloud infrastructure and operations and the VP for technology and civic engagement. The energy team at data service firm EMC (now a division of Dell) reports to the CFO.
2. Integrate Energy into the Company’s Vision and Operations
The team’s first job is to assess the firm’s internal and external energy impacts. Among the questions it should consider are: How much energy does our firm use, and what does it cost? What impact does this spending have on key financial indicators such as cost of goods sold? Are we capitalizing on opportunities to use renewables? What is our carbon footprint and that of our suppliers? How does this align with customer, investor, and employee expectations, and how do we compare with competitors?
Answers to these questions will quickly reveal performance opportunities and gaps. For example, a big box retailer can measure its energy use per square foot of retail space and calculate the cost savings potential from addressing the gap. The company can also assess its annual rate of energy reduction. Large retailers with solid energy programs are achieving sustained annual reductions of 2.5% to 3.5%. On hundreds of millions of dollars of energy spend, those reductions represent significant bottom-line savings. And similar calculations for carbon intensity would highlight exposure to fuel price swings and indicate the company’s success at adopting renewables.
Once the team has a clear understanding of the firm’s energy impacts, it can develop an action plan with several broad areas of focus, beginning with a recommendation to the CEO for specific energy and emissions goals. Aggressive targets should reflect the degree and pace of emissions reductions that scientists have determined are required to mitigate climate change. Nearly 200 of the world’s largest companies have agreed to set such science-based targets, and more than 80 firms have signed on with the global initiative RE100, which commits an organization to move toward 100% renewable energy. A growing number of companies are requiring that their supply chains meet science-based targets as well. Setting public targets not only signals the firm’s commitment to external stakeholders, it also helps align the many different functional groups across the enterprise, drives accountability, and inspires employees.
Once targets are set, the team must create incentives for people throughout the organization to make energy an operational priority. General Motors, for example, which spends more than $1.2 billion on energy annually, has woven energy efficiency into its standard global and plant business plans. The plans, which are tied closely to compensation for plant managers, include not only expected operational metrics such as production volumes but also energy and environmental key performance indicators such as energy used per vehicle produced. If managers fail to hit energy targets, they need to explain why to global leadership. As Mari Kay Scott, GM’s environmental compliance and sustainability director, puts it, “We make [energy efficiency] imperative in the plant…along with safety, quality, cost, [and] responsiveness.”
In addition, the team should advise on how to integrate energy considerations with strategic processes and priorities. For example, energy needs to inform risk assessment, as it did in Microsoft’s case. Facilities and operations managers should consider energy in their resilience and business continuity planning. And the finance team needs to prioritize energy and carbon reduction in the capital allocation process. Johnson & Johnson and GM set capital aside annually for efficiency and carbon reduction projects—$40 million in J&J’s case and $20 million at GM.
Finally, the energy team can help connect two operations that are usually distinct: procuring energy and managing its use. Typically, managers in one part of the organization focus on buying energy at the lowest possible price and developing a budget and a risk strategy; managers elsewhere are working to reduce consumption and improve efficiency. Coordinating those activities can save or make money and reduce risk. For example, the procurement managers might choose energy contracts with higher costs during the grid’s peak demand times in exchange for lower rates during off-peak periods. The managers working the demand side could shift consumption to avoid peak periods and even collect demand-response payments from utilities for curtailing use at peak times. Companies are also experimenting with lowering their peak-use demand by using energy stored earlier. Kendall-Jackson wineries, for example, has used batteries from a Tesla/EnerNOC pilot program to store energy from its solar panels. This lowered the winery’s energy bill nearly 40% in 2016—saving it $2 million—and increased its resilience in the face of potential power outages.
3. Track Energy at All Levels
It’s often a rude awakening to C-suite executives that their firms can’t easily say how much energy they use at either the enterprise level or the level of individual plants or activities. Energy is among the biggest cost areas for companies—along with people, product costs, facilities, and equipment—but it’s the only one that is not monitored and managed carefully. Indeed, it’s often the largest inadequately monitored part of a company’s cost structure. Most companies lack good systems for accessing energy data quickly or in a form that provides actionable information. When networking giant Cisco installed 1,500 energy sensors in one of its Asian manufacturing facilities in 2015, it measured the plant’s total energy use for the first time—and soon found ways to cut it by 30%. Cisco’s VP of supply chain, John Kern, told us, “We always manage costs so closely, but we weren’t really measuring energy—we didn’t know how much we spent!” This is a common gap among manufacturers, but it’s a troubling one, because, as Kern noted, energy is typically a factory’s largest variable cost.
Monitoring and analyzing energy use can reveal operating issues that affect costs, performance, and quality. For example, “energy signature” data may show that a piece of equipment, such as an HVAC system or an injection-molding machine, is running outside its optimal operating range. Blommer Chocolate, a large cocoa-bean processor, uses statistical analysis to predict the energy required for every pound of product roasted. When actual consumption varies from the prediction, managers know something is off. One building products manufacturer monitors energy costs for each product line (some 30,000 SKUs) and has used that data to adjust prices and ensure profitability.
Comparing energy use at similar sites or plants can uncover efficiency opportunities as well. One hospitality and entertainment company uses a quarterly energy scorecard to compare properties. The sites that are lagging can learn from the leaders to improve performance. Similarly, a movie theater chain worked with its air-cooling partner, Ingersoll Rand, to gather energy data and then apply predictive analytics to data on past and current use. In this way, it optimized the HVAC operation in each auditorium according to expected show times and ticket sales. And oil refiner Valero, using fairly inexpensive energy meters and energy intelligence software to capture real-time data, found $120 million in energy savings in the first year.
Developing a detailed understanding of enterprise-wide energy use is also essential. This information can help a firm predict how volatility in energy prices and availability will affect its overall operations, profits, and cash flows.
Zooming out further, companies must look across their entire value chains for risks and opportunities. It’s often the case that the majority of most firms’ energy and emissions impacts are outside their direct control, residing either with suppliers or with customers. The biggest operating risks from price volatility and future regulation may actually lie upstream. Many leading companies require that their tier-one suppliers, at the very least, provide data on their energy use and carbon emissions. But suppliers, like most companies, lack good systems for tracking energy use, and to the extent that they do, it’s often a slow, laborious, and manual process. Some companies, such as Walmart, offer their suppliers tools to help them reduce carbon emissions and energy consumption. The first supply chains to automate and perfect this accounting will have an advantage in cost control and risk reduction.
Companies should also look downstream in their value chain to understand how much energy their customers use. For some sectors, their products’ energy and carbon footprint during use are major points of competitive differentiation. Ingersoll Rand intensively engineers and promotes the energy efficiency of its pumps, compressors, and refrigeration technologies and has added intelligent controls that analyze how the equipment is performing and self-optimize for efficiency. Boeing has partnered with customers to make sure its engines can run well on carbon-neutral biofuels, a technology many global airlines are committing to. And most large technology and car companies have set aggressive energy-efficiency goals for their products. These innovations lower costs and differentiate products, driving sales and customer loyalty.
4. Shift to Renewables and Other Advanced Energy Technologies
The market for clean energy technologies is changing fast, and companies need to understand both the technologies and their financing options. Firms that aren’t aggressively incorporating renewables and other new energy technologies into their overall energy strategies are overlooking important benefits and exposing themselves to an array of risks.
The energy landscape today is characterized by dramatically increased supply and plummeting costs of a range of alternative energy technologies, including wind turbines, photovoltaics, biofuels, fuel cells, advanced batteries, LED lighting, and advanced meters. The newest renewable-energy projects are pricing energy below the cost of any source of power. In 2015, the average price of electricity from new long-term-contract wind power projects in the United States was two cents per kilowatt-hour, down five cents since 2009. New solar projects in sunny areas like the Middle East and Mexico are coming in below three cents per kilowatt-hour.
As with all forms of energy, government incentives make the economics more attractive. But even without help, the cost of clean technology is dropping shockingly fast. The total costs of developing solar and wind energy have fallen 74% and 55% respectively in just five years. The cost of LED light bulbs has dropped a remarkable 94% in less than a decade. The cost of storage technologies—batteries that eliminate the key remaining challenge of renewables, intermittency—is falling quickly as well.Andrew Winston, George Favaloro, and Tim Healy. (n.d). Energy Strategy for the C-Suite. Retrieved 12th August, 2022 from
https://hbr.org/2017/01/energy-strategy-for-the-c-suiteChima Nwokoji. (April 18, 2022). Rising Cost Of Energy: Banks Begin Reduction In Branch Operating Hours. Retrieved 12th August, 2022 from