Industry Market Trends

Energy and Carbon Management Are Increasingly on Manufacturers' Radar

Aug 27, 2012

Credit: Marcel Oosterwijk, CC BY-SA 2.0

New research from Aberdeen Group suggests the emergence of a new breed of manufacturing company where management of energy and greenhouse gas (GHG) emissions is central to corporate strategy. Leading companies of this breed have refined methods for collecting and reporting energy and carbon data across the enterprise and using it to make day-to-day management decisions.

In its report, "Energy and Carbon Management: A Roadmap for Sustainable Production," released in July, Aberdeen analyzed responses from 105 manufacturing executives about their energy and carbon management regimes to identify best practices for reduced energy usage and GHG emissions, as well as improved operating margins.

As expected, the strongest force behind manufacturers' focus on energy and carbon reductions is the need to lower operating costs. Sixty-three percent of respondents reported costs as their top motivator. The pressure to ensure compliance with energy and carbon regulations was the second-highest motivator, reported by 50 percent of respondents.

The financial motivation is usually what first leads companies to energy and carbon management, according to Gregory Unruh, professor of global business at Thunderbird School of Global Management, and director of the Lincoln Center for Ethics in Global Management, in Glendale, Ariz. Unruh tells me that in years past the financial benefits of energy management might have "looked minor compared to investing in new product development or a new marketing campaign." But now, he says, with the price of energy going up, the economics of energy management become "much more interesting." As a unit of energy goes up in price, "it cuts the payback period" for an energy-management project.

Aberdeen's report labels 35 percent of its respondents as "leaders" in energy and carbon management, i.e., firms that have shown greater reductions in energy and emissions while performing well financially. These leaders have reduced their energy consumption by an average of 7 percent year over year and emissions 8 percent. Their energy consumption performance has exceeded corporate goals by an average of 13 percent. Their operating margins have exceeded budgeted margins by 14 percent.

How They Do It

The leaders identified by Aberdeen use a combination of strategic actions, effective organizational structure and information technology that leverages energy and carbon management.

"Think of energy systems as fractal," says Unruh. "Energy systems function on different scales. A building itself is an energy system, so it can be managed as a whole, as a smart building."

The same can be done with a manufacturing line. "But you can also put monitoring systems into the individual motors, kilns, or whatever other equipment, so they give information about actual energy use," says Unruh. The "finer grain" the measurements, the greater control the company can exert to optimize its energy usage.

Aberdeen's report noted that leaders, as a matter of strategy, are redesigning and aligning their manufacturing processes to support their organizations' energy and carbon goals. This means that they are looking at energy consumption at the unit level, as Unruh suggests.

Each of these leaders, however, is also working to develop a big-picture view of organizational performance, the report said, developing "initiatives to holistically manage their energy and carbon programs beyond manufacturing but across the organization."

But Aberdeen stressed that simply gaining short-term return on investment (ROI) is insufficient -- it is necessary to "bake in" business capabilities and processes that allow the organization to make continuous improvement.

Once organizations have identified the low-hanging fruit ... organizations need to understand that investing in a longer term strategy can deliver even better improvements and sustain value to both corporate reputation and the bottom-line financials.

Unruh similary cautions about short-sightedness. He cites a program instituted at 3M in 1975, in which the company developed a recognition program for employees who identified ways to save energy and reduce pollution. After one year, some managers admitted that the program worked but objected, "We've already picked the low-hanging fruit, why go on with it?" But the program's sponsors persisted.

As it turned out, low-hanging fruit kept appearing and getting picked. The program, called Pollution Prevention Pays, or 3P, continues today. 3M says 3P "has resulted in the elimination of more than 3.5 billion pounds of pollution and saved us nearly $1.5 billion."

As Unruh tells me, "low-hanging fruit grows back"; in other words, the same processes that yielded short-term ROI can keep delivering returns over and over.

Aberdeen's report cited a number of key business capabilities that characterize the leading companies in energy and carbon management:

  • Establishment of a "formal energy and carbon program" with executive sponsorship and cross-functional support and execution
  • Development of an "enterprise-wide framework" providing "a clear understanding of the organization's energy management programs"
  • Establishment of "maintenance schedules and alerts" based on the real-time condition and energy efficiency of particular assets
  • Adjustment of production schedules based on energy costs.

This level of visibility and control can only be achieved with integrated information technology that gives decision-makers the "the ability to drill down the performance of their energy and carbon programs across product line, geography and facility," Aberdeen said. Such information systems also need to provide a level of analysis that shows management the financial effects of the decisions they make and benchmark the company's performance against peers and competitors.

Successful companies in this arena are developing data sources in areas such as plant automation. The information is transferred directly from utility bills, sub-meter and sensors and dedicated energy management systems. Data is delivered to decision-makers through reporting tools, analytics, dashboards, simulation and modeling and mobile applications. Aberdeen said the leaders in this area are 70 percent more likely to invest in reporting tools than companies labeled as "followers" in its report.

Investors' interest in energy and carbon management is expressed in a report from Ceres, a network of investors, companies and public interest groups. In "The 21st Century Corporation: The Ceres Roadmap for Sustainability," Ceres outlines a set of 20 "key expectations related to governance, stakeholder engagement, disclosure and performance."

One of those key expectations is that a company should achieve "a 50 percent improvement in energy efficiency and a 25 percent lower carbon footprint by 2020." Companies that meet these kinds of expectations, says Ceres, "will be best positioned to thrive in the coming low-carbon, resource-constrained global economy of the 21st century."

Many companies have gotten onboard with annual public reporting of GHG emissions. The Carbon Disclosure Project (CDP) publishes information on GHG emissions and provides it for 655 institutional investors with total assets of $78 trillion. In 2011, 3,715 companies responded to CDP's requests for data, including 81 percent of the Global 500 and 68 percent of the S&P 500.

This fits with Aberdeen's suggestion that carbon and energy reporting should begin to exhibit "the same rigorous standards applied to financial reporting."

Organizations should start viewing carbon and energy as the "second currency" -- and apply the same level of granularity, accuracy and auditability when reporting to government bodies.