Rising energy prices are emerging as the greatest challenge now for manufacturers. This is to some extent driven by the rise of India and China but it has been going on for some time. Anyone with a sense of history will point to the mid 1970s when energy prices started creeping up. They have only been heading in one direction ever since.
Unfortunately, many companies fail to address energy issues and implement programs for one very good reason: most see energy as a fixed cost, rather than an investment. Energy efficiency programs tackling the rising cost of energy can only take off when they are seen as an investment that can give companies control over energy use and high rates of return.
Former Woolworths chief Roger Corbett has warned that energy costs could increase up to tenfold over the next few years. That will profoundly change the way business and society operate.
Corbett told a Queensland University of Technology business leaders’ forum in Brisbane that rising energy costs would “no doubt” present challenges for the retailing and business sectors.
“Our lives in the Western world are absolutely dependent upon the unit energy cost, whatever it may be, most of all the petroleum costs,” Corbett said.
“And I don’t think it’s ill-conceived to think in the next few years that energy cost may go up by a factor of five or 10 times – certainly five.
“And I think that’s going to make an immense difference to the way we all live our lives.
“The question of the cost of energy is going to be the big challenge to business in the years to come.”
Origin Energy chief executive Grant King has warned that energy prices are set to increase dramatically with mandatory renewable energy target (RET) and network spending would putting upward pressure on prices.
Inevitably, that will leave consumers paying higher prices.
It wasn’t always like this. Energy prices were cheap in the early 1970s but prices started inching up in 1973. The 1973-74 Arab oil embargo gave the rises more momentum. They has been going up ever since and the demand from India and China is giving the problem more urgency. China and India have turned global energy markets on their heads and will account for 70 per cent of new oil demand between now and 2030.
In particular, China, which just over a decade ago was a net exporter of oil, now imports 5.4 million barrels a day. It surpassed Japan as the world’s biggest importer of oil in 2005, and is projected to consume Saudi Arabia’s entire annual production by 2012. The Organisation for Economic Co-operation and Development is projecting that energy consumption will quadruple by 2050.
Global electricity generation is expected to continue to increase in the years to come. The growth in the electricity generation can be attributed to increase in the population and economic growth in the emerging economies and a corresponding increase in the usage of electricity for residential, commercial as well as industrial purposes.
At the same time, however, output from the world’s oil fields is declining at a faster rate than expected and will require massive investment. Bet, in other words, that oil prices are mostly going one way.
According to a PricewaterhouseCoopers Manufacturing Barometer released earlier this year, concerns about energy costs were rising. At the beginning of last year, 21% of manufacturers cited oil and energy prices as a major concern. By the beginning of 2010, this had risen to 30%. These concerns are likely to grow.
At the same time, however, oil production has peaked. Demand is increasingly exponentially, but output is slipping. Experts now say that oil production in 33 out of 48 countries has peaked. That includes Kuwait, Russia and Mexico. International Energy Agency chief economist Faith Birol warns that the output of conventional oil will peak in 2020 if demand continues. Other specialists say oil will not so much peak as plateau, giving countries time to deal with the problem. It’s all a question of timing. We have used up most of the world’s readily accessible oil.
Energy has never been as critical to the health of economies. The result: governments and oil companies are looking for oil in less accessible places. According to the US Department of Energy, world energy output must rise by 57 per cent over the next 25 years to satisfy expected international demand, largely driven by India and China. Without this extra energy, the world economy will fall into recession or depression, and that would tip the planet into chaos.
An article published in Der Spiegel magazine in September revealed that a German military think tank report strategically leaked online has warned that peak oil will occur soon “and that the impact on security is expected to be felt 15 to 30 years later”. Peak oil, according to the report, could threaten democracy, creating “room for ideological and extremist alternatives to existing forms of government”. It says this could “in extreme cases lead to open conflict”. The report has also warned of market failures, huge tax rises, food shortages and widespread rationing.
Oil is used in producing 95 per cent of industrial goods, so the report predicts price shocks right through the supply chain. “In the medium term, the global economic system and every market-oriented national economy would collapse,” it says. The Germans also predict a shift away from a market economy, back to central planning. “A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis,” the report says.
This does not mean that the world is running out of oil. Rather, it means we have reached the limit of our ability to extract cheap oil on demand. Worldwide discovery of oil peaked in 1964. It has followed a steady decline since. Research by industry consultants IHS Energy reveals that 90% of all known reserves are now in production, suggesting that few major discoveries remain to be made. Indeed, there have been no significant discoveries of new oil since 2002 and it is unlikely that any area large enough to be significant has eluded attention. No amount of technology will change that.
All this will make energy efficiency a key part of any manufacturer’s strategy moving forward. While all manufacturers these days claim they are going green, how many of them have made energy efficiency and sustainability a part of their overall performance strategy? Research carried out by Boston based consultancy, the Aberdeen Group, found that the most energy efficient companies averaged 90% overall equipment effectiveness and 15% reduced energy consumption and outperformed corporate operating margin goals by 14%. They understood which energy data to collect, where to find it, how frequently they should gather it and how to effectively use the information. Also, they were more than two times as likely to consider energy management as one of their top three strategic focuses and were twice as likely to establish a companywide energy-awareness culture. Many of them had invested in technology. Using statistical process control software, analytics, dashboards and alert management, they could drill down into energy data for such information as usage per production line, plant or product produced.
A number of companies now build key performance indicators around energy efficiency, making it the responsibility of all workers and ensuring it cascades through the organisation.
No energy saving program can work without the co-operation and involvement of all staff members. Some companies have taken steps that include establishing forums to inform employees about energy, waste and water savings, creating “sustainability advocates” and “green teams” comprising people from each major department such as maintenance, marketing, finance and operations to help monitor and implement efficiency measures. Some also reward employees for energy saving ideas.
Apart from training staff to switch off lights and computers when they complete, other measures can include virtual computing, introducing motion sensors in meeting rooms, storerooms, walkways, entrance ways, bathrooms and even general work areas to control lighting, installing timers to control all sorts of electrical loads and therefore save power and money, even placing these timers on power distribution boards or on individual power points.
Manufacturers embracing energy efficiency will be ahead of the pack. Energy efficiency is not about saving the planet or the environment. It has become a question of strategy.
