Will the Green Deal help my business be more energy efficient?

Greg Barker and Green Deal providers.  Credit: DECCgovuk

The government wants businesses to become much more energy efficient, and the Green Deal was meant to be one of the ways to encourage it.  Big firms may be able to finance their own improvements, but finance was seen as an obstacle for SMEs in particular.  This was to be the purpose of the Green Deal for business customers – to provide affordable financing for energy efficiency on a “pay-as-you-save” basis.  Yet the media is full of assertions that it will do no good.  Do we have a problem?  Is the Green Deal a big deal for your company?

Delay

DECC announced recently that the Green Deal will roll out for domestic properties in October as planned, but that it won’t be available to non-domestic properties until later.  Ostensibly this is because it is more complicated.  Whatever the reason, this does mean that only home-based businesses will qualify in October – as long as they apply under the umbrella of the domestic Green Deal.  Any firm that has outgrown the dining room or barn conversion will have to wait – and as yet we don’t know exactly how long.

Landlord – Tenant problem

The Green Deal improvements are paid for by a financing company, while the beneficiary pays for them over the life of the project through their electricity bill.  How will this work for business tenants?  Apparently this has not been thought through, even though there are plans in place for ensuring domestic tenants and landlords can take advantage of Green Deal offers.  Commercial tenancies may be sufficiently different from their domestic counterparts that significant alterations need to be made to the scheme to make it suitable for companies.

So now we can see some problems.  However, just because a policy is coming under fire from the media and commentators, that doesn’t mean it will be no good, nor does it mean that you shouldn’t be interested.

So does my company need the Green Deal?

Most companies can save substantial sums by revisiting their use of energy and other resources.  However, the largest companies – and some smaller ones – have already been gaining enormous profits from doing this, without the Green Deal.  Why might your company need it?

First, the Green Deal specialises in sorting out energy usage.  This will give your organisation focus, if that’s what you need.

Second, the Green Deal will have specially trained energy advisers who will give your firm a report on energy efficiency opportunities.  Many such people exist already, and some NGOs even offer this service for free to qualifying companies, but if your firm hasn’t located this sort of expertise, the Green Deal might simplify the process.

Third, and by far the most compelling, is that the Green Deal offers finance.  The “pay-as-you-save” approach to efficiency improvements has been tried elsewhere and can be very attractive to a firm short of cash.  The concept is simple: a finance firm pays for the efficiency investment.  Payments to the finance firm come from the beneficiary’s electricity bill.  The “Golden Rule” means that the extra payment to the finance company must be less than the savings made through efficiency, so the beneficiary still saves a bit of money (and much more once the finance firm is paid off), but doesn’t need to invest their own capital.

This may be attractive to those firms eager to invest, but without other access to capital at affordable rates.  For firms that are sitting on cash, or whose credit rating makes loans affordable, the Green Deal may not offer a better rate than they would have been given elsewhere.

What should my business priorities be as regards the Green Deal?

Here there is no question.  Your priority should be to invest in people, technologies, processes and knowhow that cost-effectively reduce your environmental footprint – your use of energy, water and other resources, and your emissions of greenhouse gasses and waste.  This is a tall order – it’s hard work and takes commitment from the top of the business and engagement of every stakeholder in the firm.  If the Green Deal has no place in your sustainable strategy because it doesn’t offer what you need, then forget the Green Deal and do what you need to do.

Competition on sustainability is not about installing energy efficient technology.  It’s about making money now, and doing it in a way that means you will still be making money in 40 years’ time – that is sustainability.  That might or might not involve solar panels and insulation, but it definitely involves thinking strategically about the way you do business in terms of resources in and out.  Get to know what is available to you from the Green Deal, but don’t let it lead your strategy.  Your firm has its own place: you should take the lead, and use the Green Deal if – and only if – it suits your strategy.

How much energy can your company save?

Lights are often left burning in offices at night.  Photo: caribb

With no end in sight to our tight economic times, companies are redoubling their efforts to reduce costs.  The continued high cost of energy makes this a favourite area to target.  Just how much can a company actually save on its energy bills?

Savings from equipment

Anything that uses power – electricity or process heat – should be your number one priority.  Lighting uses about 40% of a building’s power and is a top target, with savings of 40-70% of lighting energy within reach.  The Carbon Trust estimates that investing in better lighting equipment can reduce electricity consumption by 20%.  Motors and drives are another area with great potential for savings – up to 60% according to ABB – and payback periods are usually very quick for switching to variable speed drives.

Virtually all machines have potential for improvement, either through replacement of less efficient technology, or introduction of controls to make the best use of the technology you have.

Savings from buildings

Buildings are great wasters of energy.  The principle problems come from heating and cooling.  Older building stock often suffers from inadequate insulation – the standards and practices set in the past were based on lower energy costs.  Even newer buildings designed with high energy efficiency in mind may not perform as expected if commissioning was rushed, or if building use differs from what was initially envisaged.

Savings from waste

Waste costs far more than most firms realise.  The cost of disposal is a tiny fraction of the true cost of waste.  Consider the cost of producing that waste in the first place – not just materials but also the labour and facilities time.  Even worse is the waste that slips past quality controls and isn’t identified as waste until it reaches a dissatisfied customer.

Figures on waste vary dramatically, but most firms waste considerably more than they realise.  In the food industry it totals around 30% of production – in developing countries most is lost at harvest and storage, and in the developed world it is lost most through consumers and distribution.

Much waste is actually visible to employees, but often considered unimportant, or impossible to eliminate.  The source of these attitudes is often in a failure to realise just how much waste costs.  Also, it is difficult to tackle waste that is unintentionally designed in to agreed processes and systems.

Savings from behaviour change

How often have you passed an empty office building at night and seen all the lights blazing?  For those of you who have worked in production facilities, how many times have you seen refrigeration unit doors left open, or machines left idling between shifts?  In the service industry, have you ever seen an open plan office where all the computers and printers were shut off at night?  Who has seen windows opened because the air conditioning or heating was set too high?

We need control over the equipment that serves us, but often in the rush of work people make choices that waste energy.  Replacing equipment may mean that the waste is reduced, and in some cases controls can help, but an even better solution is to eliminate this waste altogether – and without capital cost – by changing behaviour.  Of course this is no easy task – but there are approaches to educating and motivating the people that really work.

How do you know how much you can save?

There are three essential steps in estimating how much you can save.  First, you must footprint your firm – find out how much energy you use, in what forms, when, and for what purpose.  This takes time to set up, but it is well worth it in terms of the savings it prepares you for.

Second, you need to estimate the potential to change each area of energy consumption.  This can be done at a high level, through benchmarking and similar comparative exercises, or at a more granular level by looking at technology alternatives or proportions of energy wasted.

Third, you need to pull together this analysis to show the big areas of energy spend, and the top areas of potential improvement.  Bring together the key people from across your organisation to examine the results.  Chances are that any area of potential savings is going to involve many departments – this is one of the reasons energy efficiency opportunities are often not spotted.

If you need help with any of this, please contact us: enquiries@jlsbm.co.uk.  We offer unbiased advice and expert consultative assistance to UK firms.

Why your waste costs 20 times more than you think

Waste disposal costs are rising.  Heightened attention is being turned to dealing with it cost-effectively, diverting it from landfill and getting the best possible income stream from recycling or re-using it.  This attention to waste is a good thing.  We want to reduce the cost of it, to make our businesses more competitive.  However the truth is that most managers are missing 95% of the cost of their waste.  If your facility’s waste costs were 20 times higher than you thought, what action would you take?

The answer is obvious – you would stop trying to maximise the recycling and re-use value of your waste stream.  Instead, you’d try to stop producing it in the first place.

Let’s look at a hypothetical manufacturing company[i].  Imagine a firm that produces high quality ready meals.  Our firm has operating costs of £50 million a year, and runs two shifts a day.  They produce 500 tonnes of waste per year, and it costs them £100 per tonne to dispose of it (fees and handling costs).  So this firm believes that its cost of waste is £50,000 per year.  This is significant enough to get attention, but at just 0.1% of total cost, it is not the highest priority.

Now, imagine that each day, an average of 10 minutes of each 8-hour shift produces waste.  This takes two main forms: 

• Occasional quality failures (e.g. too little product in one tub, or a run with wrong dates)
• Planned waste, while a new run is started, and the machines are adjusted to get the machines aligned perfectly

So for an average of 20 minutes per day (10 minutes for each of two shifts), the facility is producing waste.  That’s roughly 2% of a 16 hour day.  In other words, 2% of the operational time, and therefore 2% of the operational cost (electricity, people, facilities costs, materials, etc) is waste.  In a facility that costs £50 million per year to run, that’s a cost of £1 million, spent on producing product that will never be sold.

This is just a hypothetical example.  Is it typical?  In fact, this is close to the average for the UK economy as a whole.  As I’ve reported elsewhere, DEFRA estimates there are £23 billion of resource efficiency savings with a year payback or less, just waiting for firms to take advantage of them – about 1.6% of GDP.

A million pounds of a £50 million budget is a substantial sum – it could be better spent holding off the next round of unwanted redundancies, investing in new capital equipment, or developing new products.  If this were your firm, wouldn’t you do whatever you could to stop the waste?

So... just how much of your operational time each day is spent producing waste?

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[i] This could apply just as well to a service company.  For example, in a call centre, it might include outbound calls to wrong numbers, and times when the computers or phone lines are down.

Do more with less – and save £23 billion

That, at least, is the conclusion of a DEFRA study published in March.  It found that for very little cost, UK businesses could produce just as much as they do today, while saving £23 billion in costs.

Given our current economic troubles, it is surprising that this hasn’t been headline news.  The topic is called “resource efficiency.”  The UK government has been trying to encourage firms to improve their resource efficiency by providing advice and grants, and even the European Commission has urged firms on, claiming that “Increasing resource efficiency will be key to securing growth and jobs”.

These claims are entirely realistic.  There are multitudes of case studies available through government agencies and in business school texts, and of course many cases have never been documented.  Just tackling the production of waste products alone – without considering any other efficiency savings – could produce big savings to the bottom line.

The fact is that the funding interventions from the government have so far been very small – less than £100 million per year of the Business Resource Efficiency and Waste scheme.  However, they indicate big potential – every £1 spent by the government achieved an average £1.64 in additional sales and £3.20 in cost savings – and those are the benefits in just one year.  Unfortunately, the budgets for this work are now being cut.

As the ENDS Report has observed, “government will have to depend on businesses stepping up their own efforts independently, without relying on public funds for advice and support.”  Increasing landfill taxes are meant to encourage firms to address their inefficiencies, but waste handling costs represent only a tiny fraction of the true cost of waste.  Moreover, there are many more inefficiencies that have nothing to do with the waste stream.

When so many companies have tackled their waste stream, why have so few put the same energy into efficiencies – that is, into not producing the waste in the first place?  It’s often no one’s job – we assume our employees will identify and eliminate waste if they can, but no one is tasked or measured on this.  And why not?  Well – since the cost of producing waste, or working inefficiently, is almost never measured, those in charge don’t realise it deserves an explicit place in their management structure.

For those companies that grasp the opportunities in resource efficiency, the prize will be higher profits, greater security, and growth.  The government will no longer take the lead, though it is a wonder that it was ever necessary.  Given the size of the prize, it is time more firms put resource efficiency on the CEO’s agenda.