Savings plan

Most modern manufacturers must dread the monthly arrival of their energy bill. Since the economic crash of 2008, electricity and gas prices have climbed steadily, and in some sectors - such as steel - this relentless rise has been cited as a primary factor in business failure.

But some enlightened companies have turned this situation on its head, and have identified energy bills as an asset, rather than a cost. By skilful management, these businesses have managed to uncouple the rate of their growth from their energy costs, with positive impact on the bottom line. By widening the gap between the amount they turnover, from the sums they spend on gas and electricity, these companies have become significantly more profitable.

Potential savings

So how has this been done? Simple – by focussing on the unfashionable yet crucial area of energy efficiency. Indeed, there are enormous potential savings to be made: for instance, research shows that up to 42% of the world’s electricity is consumed by factories, and of that roughly two thirds is used to drive the motors in machines. If energy efficiencies in this area of manufacturing and production can be achieved, costs can be significantly lowered, and savings then used to repay investments. This is a sure-fire way of making the most of energy bills, using them as an asset to deliver improvements to the bottom line.

“Successful implementation of energy efficiency programmes around technologies and equipment such as motors, lighting and machinery are rightly identified as a means of improving environmental credentials, but they can also have a positive effect on the balance sheet,” says Jonathan Hart, from power management specialist Eaton. “Manufacturers face a range of challenges in their competitive landscape, but they also have enormous opportunity to achieve sustainable cost bases. Companies that adapt will have the freedom to increase investment in innovation and new technologies. Companies that have lowered their cost bases and freed up expenditure also have the flexibility to exploit new opportunities. That’s why energy bills should be viewed as an asset rather than cost.”

One method of maximising returns in this area, says Eaton, is for manufacturers to employ the services of a dedicated energy manager to plan, regulate and monitor energy use. The energy manager would be tasked with improving efficiency by evaluating energy use and putting in place new policies and changes where needed. This can cover coordination of a full range of energy management activities, from reduction of carbon dioxide emissions, to encouraging the use of renewable/sustainable energy, and developing solutions for carbon management.

However, Eaton says that many manufacturers fail to have energy managers in place, despite the fact that they can deliver huge savings. “It’s surprising that so few manufacturers employ energy managers, and it represents a missed opportunity,” says Hart. “Energy costs as an operational expenditure are usually quite similar, if not larger in scale to that of a company’s IT spend. Companies are happy to have large IT departments, amounting potentially to dozens of people, yet fail to put a single individual in charge of energy. That doesn’t make sound business sense.

“A good energy manager can driver change, and deliver real cost savings. It is something that more manufacturers should consider if they want to reduce costs.”

Legislative role

Eaton also believes that governments and legislative authorities have a role to play in helping to encourage manufacturers to invest in new energy-efficient equipment such as motors and lighting, leading to lower bills. The European Union has committed to ambitious targets of reducing industrial energy usage by 27% by 2030. To achieve this, Hart believes more pressure needs to be placed on energy-intensive companies to increase their energy efficiency.

“European countries have displayed great courage in committing to radical de-carbonization targets. To achieve these, governments across the EU need to encourage their resident industrial companies to invest in energy efficient technology. Until energy-intensive industries reduce their reliance on fossil fuels, the scope for large-scale reductions in carbon emissions is limited,” he says.

In the UK, specifically, one means of aiding investment would be to provide bigger tax breaks for advanced manufacturers. Specifically, Eaton would like to see more financial incentives and the extension of tax relief to help manufacturers to invest in new energy efficient technology.

The existing Enhanced Capital Allowance scheme, for instance, allows companies to offset the cost of new energy-efficient machinery such as such as air compressors, boilers, electric motors, air conditioning and refrigeration systems, but only in the first year. While major industrial purchases of such machinery can expect to see a return in just three years, the company argues that the tax relief needs to be extended to reflect this investment cycle. Eaton would like to see the government make it simpler for companies to claim credits under the Enhanced Capital Allowance scheme, and for the introduction of more specific categories and product listings to make it easier for purchasers to identify qualifying products.

“The UK government has been explicit in stating its desire to reduce energy demand,” says Hart. “One of the most obvious ways of doing this is by encouraging industrial companies to cut down on their electricity consumption. While the Enhanced Capital Allowance goes someway to doing this, we believe the government needs to look at improving this initiative. This is a crucial route through which demand-side reduction can be achieved.”

Some nations are making a better job of supporting their manufacturing base to make investments in energy-efficient equipment, Eaton notes. Germany’s Federal Ministry for Economic Affairs and Energy has introduced a range of incentives to manufacturers, from consulting services to subsidies. It has also published the Energiewende, a central policy document that outlines various energy efficiency objectives as far into the future as 2050. Unfortunately, such long-term planning isn’t evident in the UK.

Bigger incentives

Eaton also sees the need for bigger incentives and better financing mechanisms for manufacturers that are considering new investment in capital equipment. The company believes that many manufacturers are holding back on investing in modern energy efficient technology due to a lack of available finance and it calls on banks and financial institutions to do more when it comes to lending to customers.

“Ultimately, a reduction in energy use would help European manufacturers remain competitive,” says Hart. “As some of the continent’s largest consumers of electricity, manufacturers are particularly vulnerable to increased energy prices. To mitigate this, significantly more investment is needed in energy efficient solutions. However, many manufacturers find the upfront cost too burdensome, despite the long-term benefits. By loosening repayment terms and introducing flexible financing mechanisms, machine builders and industrial facilities could be encouraged to accelerate the purchase of energy efficient technologies. And that is a win-win for the both environment and the future of Europe’s manufacturing sector.”