Commercial, Finance, Industrial - October 2, 2019 - By ISG Energy Enterprise Solutions
The CFO's guide to energy management
Here’s a question for CFOs: When was the last time you took an in-depth look at your company’s energy strategy? Energy may not always be your key focus or core competency. However, just like materials and transportation, energy is an area in which companies can bleed out cash—or find opportunities to save big. With the energy industry’s consolidation of suppliers, consultants, and equipment manufacturers, viewing your company’s energy strategy through a financial lens is key to finding ways to reduce costs and improve earnings.
Understanding your company’s energy cost drivers, consumption profiles, operational requirements, and environmental footprint will allow you to develop a strategy that demonstrates a commitment to sustainability while driving savings to reach financial targets. Here are seven areas for CFOs to consider when looking at their company’s energy strategy.
- Energy spend is “addressable.”
In many organizations, utility expense is directly tied to operating expense, which is considered “unaddressable.” However, if managed effectively, energy is a spend category that can make an impact. Companies with a competitive advantage identify energy as “addressable” and use their energy expense to improve EBITDA and move the needle on results.
- Don’t trust your energy budget.
CFOs are often reliant on other stakeholders to report utility use and maintenance expenses, which are traditionally set as a run-rate. As long as the energy spend is relatively consistent year after year and makes sense with operational needs, you probably trust their expertise and approve the budget during capital planning.
And yet, when you look at your energy budget from a financial perspective, it’s critical to understand that every dollar spent on capital equipment should be considered an opportunity for reducing energy.
- Think of energy cost savings as an asset.
Again, just like merchandise and materials, energy has the potential to generate a return that is equal to or greater than other assets such as equipment or intellectual capital.
So, why should a CFO take a deeper dive into energy expenses? When an organization implements a comprehensive energy strategy that uses procurement savings to self-fund energy consumption projects in the areas of energy efficiency or renewable energy, there is no longer a fight for capital. Without having to say no to energy efficiency projects simply due to a lack of money, you can reinvest savings into a strategy that allows a greater return on investment.
- Start with the data.
Uncovering opportunities to save on your energy spend must begin with data. Understanding what your utility invoices are really saying and being able to identify opportunities from that data can dramatically improve your current energy strategy. Implementing utility bill processing tools can help identify billing errors, missing bills and misallocations to find immediate savings opportunities. If it takes your procurement team more than an hour to provide a breakdown of all energy data, then you do not have adequate visibility into your energy spend and you could be missing out on savings.
Once you have the data, you can use what you learned in your energy data analysis to create a savings target and roadmap towards achieving it. Setting a savings goal can be a great way to get key stakeholders on board and invested in understanding current and future energy needs. Also, make sure to track progress to ensure your company is identifying any supplier or pricing issues and capturing full potential benefits.
- Regulated energy spend is not “un-addressable.”
If you operate in deregulated markets, you should consider your options for sourcing electricity and natural gas on the open market. But even if you operate in a regulated market – and nearly two-thirds of U.S. utilities serve in regulated markets –you may have an opportunity to negotiate with your utility or choose from a tariff menu of rate options. If your company has facilities in more than one regulated market, having an expert review your invoices for hidden opportunities is crucial. Their deeper understanding of utility rate tariffs, as well as their working knowledge of opportunities available from large, investor-owned utilities with flexible rate structures, could point you towards options that yield quick, ongoing savings at an enterprise level that you might not discover on your own.
- Manage risk within a dynamic energy market.
The S&P 500 moves on average +/- 1% per day, while the energy sector averages volatility of at least 3.5% daily. How can a CFO mitigate the risk of their energy spend in such a highly volatile market?
Leveraging in-depth market knowledge is the only effective way to manage risk within an energy strategy. Many times, organizations choose long term fixed positions hoping for budget certainty but lose out on savings when markets move favorably. Having access to energy futures markets and experts who proactively track trends and forecasts is crucial to mitigating risk and capitalizing on savings.
- Sustainability can still mean savings.
Customers are increasingly expecting companies to include social responsibility in their corporate strategies. The good news is that implementing sustainability initiatives, such as reducing carbon emissions, can also create opportunities for savings.
Look toward high-return projects with positive environmental attributes. Investing in renewables and understanding ways to manage energy demand can help offset expensive utility energy. Companies can also reap savings from increased energy efficiency with a host of strategies, including installing LED lighting, making HVAC upgrades, and adding energy management controls to reduce power consumption.
As your company begins to plan and budget for next year, creating an energy cost management strategy that takes advantage of savings opportunities should be a priority.
When it comes to looking at your energy cost and usage, it helps to view strategies comprehensively through a financial lens. However, many companies don’t have the experience or expertise to effectively assess the entire energy category. Working with a team of energy experts can help ensure your company selects the right sustainability projects and executes strategies to maximize savings.
At ISG Enterprise Energy Solutions, our team of energy experts partner with clients to provide comprehensive supply and demand management solutions in order to reduce energy costs and manage risk. By understanding our clients’ cost drivers, consumption proﬁle, and operational requirements, we are able to assist them to identify, analyze, and execute sustainability solutions that meet their ﬁnancial targets.