Hidden treasure Why energy efficiency deserves a second look. By Oliver Straehle, Kim Petrick, Fabian Stierli and Adrien Bron Oliver Straehle is a Bain partner in Zurich and leads Bain’s German and Swiss Industrial Goods & Services practice. Kim Petrick is a partner with Bain & Company in Munich and a member of the Industrial Goods & Services prac- tice, serving clients in the energy and infrastructure sector. Fabian Stierli is a principal and Adrien Bron is a manager; they work for the Industrial Goods & Services practice in Zurich and have broad experience in the energy sector. Copyright © 2013 Bain & Company, Inc. All rights reserved. Hidden treasure: Why energy efficiency deserves a second look Executive summary CEOs often ask us what they can do about energy effi- Bain’s research and project experience show that a typi- ciency. Most feel that they need to act on the topic—80% cal manufacturing company in Europe or North America of respondents to a 2010 Economist Intelligence Unit can save between 10% and 30% of direct energy costs in survey agreed that energy efficiency is becoming more three years. Indirect savings, like reduced maintenance, important—but only half said their companies were materials and waste, as well as lower risks, typically add doing enough to integrate efficiency into their business another 50% on top of the direct energy cost reductions. strategy. Beyond these savings, energy efficiency delivers benefits At Bain, we believe that energy-efficiency programs around corporate social responsibility, employee mo- significantly improve the sustainability, economic sta- tivation, improved sustainability and a secure base of bility and image of an industrial or consumer goods economic activity. Depending on the respective products manufacturing company. and value chain position, energy-efficiency products and energy-efficiency services can also make for improved offers and even new business models. Energy efficiency is an option Energy efficiency is an option today, but it’s likely to be a necessity very soon. Few manufacturers can pass up today, but it’s likely to be a necessity the opportunity to improve profitability by 2%, mobi- very soon. lize their employees or ignore new business opportu- nities. We believe energy-efficiency programs will play an important part in keeping European and US manuf- acturing competitive over the next decade. While the Some corporations in energy-intensive industries have regulatory environment is still in the making, the pure been tackling the subject for a while. Dow Chemical business logic is already convincing today. Company, an early adherent, says it has saved $24 billi- on since launching its energy-efficiency program in the 1990s. BASF, GE and Toyota claim similar benefits. Talking with these and other companies reveals a wide range of benefits beyond direct energy savings. 1 Hidden treasure: Why energy efficiency deserves a second look 1. A wide range of benefits, and a “must” ongoing initiative that gets institutionalized within the company—much like quality management, with which Most manufacturing executives think of energy effi- it shares many goals. ciency only in terms of cost savings. They scrap old, energy-guzzling equipment and think they did a good Substantial direct and indirect savings job. In truth, they did only half the job, because energy efficiency offers much more. It can reduce non-energy Energy is one of the few remaining opportunities to costs, for example, create new business opportunities, reduce costs in manufacturing. Energy accounts for significantly improve the company’s image for all stake- about 5% of costs for an average manufacturing com- holders and help companies stay competitive and attrac- pany, more in energy-intensive industries. An energy- efficiency program can save between 10% and 30% of tive to customers (see Figure 1). In order to reach its full potential, an energy-efficiency program must cover the those energy costs within three years. Indirect savings whole value chain, from sourcing to selling. from reduced maintenance, materials, waste and risk increase the benefits, combining to effectively cut direct A complete energy-efficiency program combines several energy costs by about half. Tax reductions and govern- aspects. It is a preemptive move to meet impending ment incentives boost the savings further in many coun- regulations. It answers concerns from the board of di- tries. Most savings come from adapting equipment and rectors on improving the resilience of the company. It processes. In production, typical efficiency measures in- addresses future needs of customers. And, it strengthens clude more effective motors, drives, boilers, furnaces, company culture by enhancing energy sustainability. Of pumps, compressors, and ventilation and heating sys- course, energy efficiency cannot be achieved through a tems. Energy recovery systems can help reduce demand. onetime improvement. Instead, it needs a holistic and On-site generation can also reduce costs, and, in some places, manufacturers can sell power back to the grid when they produce more energy than they use. A plan to use energy flexibly, reducing usage during peak times, Figure 1: There are many reasons to care about saves even more. energy efficiency Bain’s calculations show that the average manufacturing company can improve its profit margin by 2% within three years, helping to strengthen industrial players and Com ct pl re ia di nc maintain Europe and the US as strong manufacturing n r e i eq w d s u i centers . n g ir th (see Figure 2) a in e t m r c v e a e g e s n r u i t s l Compliance with tightening regulatory requirements D a t EnErgy o r EfficiEncy: y EU directives aim to reduce energy consumption by sEcuring 1.5% annually between 2014 and 2020, so most or- industrial ganizations will need to implement energy-efficiency businEssEs l a N i programs to ensure compliance. Energy management at c o e o y p w s t large companies will be audited every four years, and se- i p e il o b t r u a ib veral current ministerial draft bills indicate that simpli- t si or s u ne p n ni ss or o fied procedures are planned for small and medium-sized tie C sp s re enterprises. National rules concretely implementing the EU’s plans are to be applied by June 2014. Source: Bain & Company 2 Hidden treasure: Why energy efficiency deserves a second look Figure 2: Typical manufacturing companies* can improve their profit margins by 2% within three years Percentage of net income (averaged over three years) COST REDUCTION SALES In most OECD ? 2.5 countries, tax Not measures ~ 0.5% ~ 0.5% quantified typically add 30%-50% 2.0 on top of the 10%-30% ~ 0.5% 10-30% Energy 2% expected reduction efficiency savings in energy gains energy costs in suppliers’ measures 1.5 energy costs, with average for typical ~ 0.5% Non-energy IG&S costs savings 50% pass- investment companies typically through payback 1.0 amount to an of ~1.5 years, when ~ 1% additional 50% of measured energy savings against 0.5 direct energy savings 0 Energy Taxes Operational Input material Own EE invest/ Improved Sales consumption and non-energy costs generation/load spend profit margin leverage incentives costs balancing Note: * Estimation for industrial companies, where direct energy costs account for ~5% of total costs Sources: US Department of Energy; Energy Tax Advisory Case Studies; Lawrence Berkeley National Laboratory; Bain analysis Germany introduced an energy tax (the “eco-tax”) in Switzerland’s Energy Strategy 2050 framework propo- 1999 to encourage energy savings in the private, public ses similar measures with compulsory efficiency targets and commercial sectors. To lessen the impact on manuf- and sanctions for companies that miss them. Meeting acturing companies, which were hit hardest by the new energy-efficiency standards will become a prerequisite tax, German lawmakers also introduced a tax relief—as for participating in public tenders. Energy inspections high as 90% for energy-intensive production processes will help reduce consumption. like steel or cement production. Over the years, some 100,000 German companies had benefited from these Corporate social responsibility tax incentives in varying degrees. However, starting in 2013, only companies that implement energy-efficiency Reducing energy consumption and using renewable en- management systems in line with ISO 50001/EN 16001 ergy sources demonstrate good corporate citizenship, certification and meet annual energy-savings targets are both strengthening the corporate image and contributing eligible for them. As of today, less than 20% of German to sales. A long-term sustainability strategy can make the and Swiss industrial firms with more than 250 emplo- company more attractive to investors and suppliers. yees have that certification, and many do not yet meet the requirements (see Figure 3). 3 Hidden treasure: Why energy efficiency deserves a second look Figure 3: Energy tax relief Energy tax relief for energy-intensive companies with more than 250 employees in Germany (in %) 25 20 15 10 5 0 2012 2013 2014 2015 2016 Companies with energy management system Companies without energy management system Source: EnergieAgentur NRW Efficiency programs also boost employee morale and is a key selling point for these devices as well as for other help make companies more attractive employers. GE’s B2B products, including elevators, electric drives, elec- energy “treasure hunts” bring together energy experts tric transmission equipment and pumps. Consumers, and employees at job sites to identify and recommend ef- too, say they are ready to pay a premium for energy-effi- ficiency initiatives. GE’s programs often include a week- cient products, such as refrigerators, washing machines, end day, when production is off and plants and offices light bulbs and cars. are idling. Employees willingly join even on their day off, expressing that participating increases their pride Companies with an energy-efficient culture are bound and personal commitment in the company, as well as to take the lead—not only in how they use energy but their sense of inclusion.