Strategic Energy Sourcing: An Opportunity Hiding in Plain Sight
A changing energy landscape provides opportunities for businesses to modify their supply portfolio and achieve financial benefits as a result. For example, growth in renewables creates a variety of new energy sources and suppliers for corporations to consider alongside more traditional power buying.
While many firms likely have a range of sourcing options at their disposal, too often companies overlook time-tested strategies to reduce costs and optimize their energy mix through strategic procurement and risk management. These strategies can result in cost savings that can fund other energy and sustainability programs in return.
But while 77% of respondents to Greenbiz and Schneider Electric’s Corporate Energy & Sustainability Progress Report realized significant returns from energy efficiency, only 29% cited strategic sourcing as one of the top two initiatives “that have delivered the most cost savings.” This was an even lower share than data collection and analysis (35% of firms), even though energy purchasing typically requires no capital expenditure and leads to rapid paybacks.
The gap between the potential benefits of strategic sourcing and the proportion of companies that are harnessing them indicates that it could be an opportunity hiding in plain sight for many corporates. Furthermore, not having a strategic sourcing plan can leave a company exposed to market fluctuations that will pose a challenge for tight energy budgets.
The energy volatility challenge and opportunity
Energy supply and strategic sourcing efforts become even more important as energy costs become volatile. The recent “perfect storm” of circumstances in Australia (including political turmoil, the closure of coal-fired power plants and over-exported natural gas) is an indicative example. In a very short period, Australian firms saw their energy costs as much as triple. Extreme weather events, such as the January 2014 “polar vortex” that took place throughout the Eastern U.S. and Canada, caused real-time spot market prices to jump as much as 30 times (up to $1,500 per megawatt-hour, as reported by grid operator PJM Interconnection).
Energy price volatility can have real impact on a company’s bottom line and exposure to these risks can be mitigated with strategic energy sourcing. Strategic sourcing activities that help companies better manage (or even avoid altogether) increasing volatility can come in many forms. Of the companies that strongly agreed they are taking steps to deal with energy cost volatility, 71% are negotiating fixed-price purchasing contracts, 64% employ flexible-price purchasing and 57% have onsite generation. These sourcing strategies are shown to deliver favorable outcomes and most firms can use at least one of these techniques.
“Sustainability and Infrastructure Sourcing is the name of our department. So, we’re all technology sourcing managers. And we have embedded members of finance that provide support. It's a cross-functional team, and it ensures that finance and sourcing walk hand in hand.” ~ Telecommunications Company
Strategic energy sourcing fuels progress
The results of the research report also demonstrate that there is a correlation between firms that actively manage energy costs and those that invest in supply-side efforts. The businesses that identified strategic energy sourcing and risk management as a top initiative to deliver cost savings were found to be more likely to invest in an array of other innovative strategies and technologies. For example, these leaders are more likely to use battery storage (32% of firms, compared to 14%), and combined heat and power (CHP) (34% compared to 24%), with small increases in the use of on- and offsite renewables (55% to 50%, and 43% to 38%, respectively).
When a leading vehicle technology manufacturer was challenged by a group of shareholders to increase energy and carbon-reduction efforts, the company started with supply-side initiatives. Since 2009, the company has saved $5.5 million on strategic procurement alone. It has also integrated efficiency and sustainability measures into its program. The manufacturer recently identified efficiency opportunities across 6 sites that would reduce energy use by 20% and it realized a 10% reduction in greenhouse gases per USD $1 million in revenue. In addition, the firm has started developing plans to incorporate renewables into its supply mix.
As this success story demonstrates, strategic sourcing activities can drive significant value for an organization. And in combination with other innovative technologies, strategic sourcing can transform how companies think about energy, changing it from a sunk cost to a financial lever to strategically manage. It’s possible that many companies are leaving money on the table – potentially up to figures in the millions – by not taking advantage of strategic sourcing techniques.
Is your company doing everything it can to minimize its energy costs?