Energy Strategy for the C-Suite16 January, 2017 / Articles
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.
To understand how firms are approaching energy strategy, we surveyed executives from 145 companies with $1 billion or more in revenue from across sectors and geographies. The research looked at the firms’ performance on 15 measures of energy practice, including developing a formal strategy, deploying cutting-edge technologies, and leveraging advanced financing mechanisms. We sorted the firms into leaders, middle tier, and laggards and gauged how well their “energy maturity” drove business value. Drawing on this research and on our decades of experience in energy consulting and management, we have developed a new framework for using energy strategy to drive business value.
In this article, we lay out the central steps in applying emerging best practices to create competitive advantage.
Before we delve in, let’s look at how one leader, Microsoft, approaches energy strategy. Like most firms, Microsoft had long regarded energy as a ubiquitous commodity: Flip a switch, and the lights—and data centers—come on. But with the rise of cloud computing and with historic volatility in energy prices, energy has become a major and unpredictable operating input and expense for tech giants. Also, companies in the information, communications, and technology (ICT) sector now rank among the world’s largest energy users, raising concerns about carbon emissions. Big NGOs like Greenpeace have launched offensives against “dirty data,” challenging the cloud-computing leaders on their environmental performance. All these pressures, along with new clean-energy opportunities, pushed Microsoft to the forefront of energy strategy.
In 2011, Microsoft’s top environmental and sustainability executive, Rob Bernard, asked the company’s risk-assessment team to evaluate the firm’s exposure. It soon concluded that evolving carbon regulations and fluctuating energy costs and availability were significant sources of risk. In response, Microsoft formed a centralized senior energy team to address this newly elevated strategic issue and develop a comprehensive plan to mitigate risk. The team, comprising 14 experts in electricity markets, renewable energy, battery storage, and local generation (or “distributed energy”), was charged by corporate senior leadership with developing and executing the firm’s energy strategy. “Energy has become a C-suite issue,” Bernard says. “The CFO and president are now actively involved in our energy road map.”
In pursuing its energy goals, Microsoft has increased renewables in its energy mix and improved energy efficiency. It now charges business units a fee for their carbon emissions, reinvesting the funds in its energy programs. It recently announced plans to source 50% of the energy for its data centers from wind, solar, and hydroelectric power by 2018, and 60% by early in the next decade.
For all ICT companies, managing energy well has become table stakes at the very least and is increasingly a competitive differentiator. Companies in other sectors where energy and emissions are critical are following a similar path. Agriculture, for example, produces up to 35% of the world’s carbon emissions. Understanding the strategic implications of this, many food-industry firms have set aggressive targets for reducing energy use and carbon emissions in their value chains. Kellogg’s, for instance, has reduced its absolute energy use by 8% and plans to cut its own and suppliers’ emissions by 65% and 50% respectively by 2050.
Although leading firms in many sectors are developing energy strategies, they are proceeding without a playbook. To be sure, some solid frameworks for energy management exist, but they are not integrated with overall strategy, nor do they explicitly address the strategic implications of global megatrends. The five steps we recommend here for building a robust energy strategy are not revolutionary—but systematically applying them to a company’s energy use is.