CEOs often regard energy costs as insignificant

RP news wires, Noria Corporation
Tags: energy management

Although corporate America can expect little respite from soaring and volatile energy prices, experts and plant managers say that it is extremely difficult, if not impossible, to get CEOs interested in cost-saving energy programs, notes a new Executive Action report from The Conference Board. The report is based on interviews with a dozen energy experts and managers.

The report — entitled Stopping the Profit Drain from Higher Energy Costs — is part of The Conference Board Mid-Market series focusing on smaller, mid-sized companies.

CEOs often delegate responsibility for cost control to other parties, such as plant managers, the head of procurement, or the engineering department. They may never look at the bills themselves, even though energy usage is often the company's third or fourth largest cost.

Notes the report: "CEOs know the labor costs in the product. They know the cost of material in the product, they know their healthcare costs, their scrap costs. But unless they've looked at their natural gas or electrical bills lately — and been shocked — they very often regard energy costs as insignificant and not worthy of attention as a regular management discipline."

Peter Garforth, an international consultant based in Toledo, Ohio, suggests that the first question CEOs ought to ask is "if my energy productivity increased by 30 percent, would it significantly improve the competitiveness of the business, over the short or long-term?"

Donald Wulfinghoff, author of the Energy Efficiency Manual, argues that "effective management of energy costs cannot occur until the top executive takes personal control of them." They don't have to become energy experts themselves, but they do have to treat managing energy costs as a business issue, "not as a somewhat flaky, unbusinesslike concern."

"This new emphasis on efficiency calls not just for strengthening management practices," says Howard Muson, author of the report. "It requires a transformation in the attitudes of company leaders who have long tended to regard fuel and power as insignificant costs — the legacy of an era when energy supplies were cheap and seemingly inexhaustible."

Energy Alternatives
While many firms use futures contracts to hedge their risks, this has become even riskier because of extreme price volatility. "The ability to use financial hedges - long-term contracts - against fluctuations in fuel prices is becoming problematic because energy supply markets are so tight," says R. Neal Elliott of the American Council for an Energy-Efficient Economy. "As a result, we're seeing a lot more companies beginning to look at renewable energy and energy-efficiency - reducing their consumption, thereby reducing their exposure. They are also looking at what we refer to as 'opportunity fuels.' These tend to be such things as landfill gas or other waste fuels that may be available in the general vicinity of a facility."

The report notes a number of other alternatives:

  • Negotiate with suppliers. "Look at the terms under which you purchase energy, your contracts with the electric company, with the gas company," urges Wulfinghoff. "Have an energy consultant read the contracts. There may be terms and conditions in there that might be changed to get you a cheaper rate."
  • Change production schedules. This is a powerful way to cut utility bills, according to Wulfinghoff. "It costs the utility company a lot more to make a kilowatt of energy for you at noon than at midnight. If you can shift your energy-intensive operations to times when the utility has a low load, you will probably gain a substantially lower price."
  • Seek alternative energy sources. One smaller company that is pursuing such a strategy is Eagle Alloys Corp., a maker of steel castings in Muskegon, Michigan. To replace natural gas used in its foundry, the company is working with the city to build a pipeline from a local landfill, where methane gas created from decaying materials is abundantly available.
  • Strengthen computerized systems. Manufacturing companies can also curb costs by strengthening their computerized systems for monitoring and analyzing production processes and detecting anomalies in energy use.

Source: Stopping the Profit Drain from Higher Energy Costs
Mid-Market Management Trends

Executive Action No. 215, The Conference Board


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