Navigating Your Energy Risk

Editor’s Note: This introduction begins our Business Impact report on the topic of Corporate Energy Strategy, unfolding here daily throughout January.

Businesses can be excused for feeling some confusion about what to do about their energy consumption. Though they’ve been told to expect an economy-wide price on carbon, the U.S. Congress failed to impose one last year, and the nations participating in the Copenhagen climate summit in 2009 did not reach a binding agreement on how to cut carbon dioxide emissions. But despite the uncertainties about what national energy policy will bring, companies ranging from big-box retailers like Wal-Mart and Costco to high-tech leaders like Google and Cisco to industrial behemoths like General Electric and IBM are embracing cleaner energy technologies that lower their carbon footprints and reduce their overall reliance on fossil fuels.

The overriding motivation has become one of simple economics. “Some of these things just pencil out well,” says Greg Neichin, a managing director at the Cleantech Group, a market intelligence firm. Indeed, a new report from Environmental Leader, a publisher of energy news and research, found that the majority of nearly 400 companies now generating their own renewable energy are doing so in order to reduce operating costs or to hedge against the prospect of higher prices for fossil fuels (see chart on next page).

This is a marked shift from the reasons companies have previously turned to environmentally friendly policies, such as a way of enhancing branding while largely continuing with business as usual—a tactic that some critics deride as “greenwashing.” In the past, companies typically pursued such efforts through corporate social responsibility (CSR) programs rather than core business units directed by senior management. According to a 2007 survey of 420 global businesses by public-relations firm Hill & Knowlton, 52 percent of companies cited “improved reputation” as the main reason for pursuing green policies and technologies.

This special report on corporate energy strategy will argue that the new corporate focus on the economic benefits of going green is being made possible not only by advances in technology but also by innovations in business models that help companies mitigate their energy risk. We’ll hear from corporate leaders who are putting energy strategies into practice, and we’ll cite research showing for the first time that a broad range of companies are actually receiving a return on their renewable-energy investments.

Over the course of this month, we’ll explore how better, cheaper renewable-energy technologies are making a difference for companies. Some of these technologies are well established. For instance, wind power has achieved “grid parity” in many parts of the world, matching the price of power generated by fuels such as natural gas. New ways of financing solar power have been making it more attractive to business. All-electric vehicles are coming to market in significant volume for the first time, and companies such as UPS and Coca-Cola are adding them to their fleets alongside hybrid vehicles.

Other technologies are newer to the mainstream. Among these are fuel cells that can now power entire buildings or retail centers for about the same cost as grid electricity, and low-power LED lighting, which retailers including Starbucks are installing in their stores. Telepresence systems and low-cost videoconferencing can dramatically reduce the need to travel by car and air. Creative new ways to power data centers can minimize carbon emissions while offering more capacity in less space. Smart building technology is poised to work with the coming smart grid to save companies substantial sums of money.

As more companies adopt these technologies, the cumulative effect could be big. Business software giant SAP calculates that its customer base, which includes 40,000 companies in 120 countries, collectively accounts for one-sixth of the world’s carbon emissions. By comparison, the entire European Union is responsible for about 14 percent.

Just a few years ago, only a handful of companies in the world were using a substantial amount of renewable energy. But early successes have shown the wisdom of aggressively, albeit selectively, switching to these sources. Costco, for instance, decided five years ago to install solar panels atop 26 of its stores, or roughly 5 percent of its U.S. retail locations. Taking advantage of a 30 percent federal corporate tax credit, the company concentrated its efforts on stores in California and New Jersey, which also had state incentives, and Hawaii, which has the highest electricity rates in the United States. Costco figured it would save 20 to 25 percent on its utility costs in those stores and that the investment would pay for itself in five years. Those systems “have met or slightly exceeded our expectations in terms of power generation performance and return on investment,” says Craig Peal, assistant vice-president of energy and building controls, and Costco is in the process of doubling its initial solar-powered locations.

Now that the Costco experiment, and others like it, are living up to their promise, these examples have helped inspire a broader-based movement toward renewable energy. Motorola gets a third of its energy from renewable sources. Johnson & Johnson gets 40 percent. Intel gets half. Sprint says that it powers 90 percent of its 200-acre headquarters complex near Kansas City with wind farms.

Meanwhile, as the costs of renewable technologies continue to fall, fossil-fuel prices keep trending upward. The price of a barrel of oil, for example, is expected to hit triple digits early in 2011, and there’s less likelihood of a retreat than there was when prices reached similar levels in 2008. “I don’t think anyone denies that the price of energy is just going to keep escalating,” says Paul Nastu, the publisher of Environmental Leader. “We’re definitely moving in a direction where companies know sooner or later they have to make changes.”

Companies that fail to do so face considerable risk. If the price of oil returns to more than $100 per barrel, many businesses, especially in manufacturing and transportation, will be forced to sacrifice profits or pass on their higher costs to consumers, reducing demand and endangering the economic recovery. If a carbon tax of some sort is eventually imposed, those who rely solely on fossil fuels for their electricity will also face higher prices.

Yet even though such risks are well known, some companies still have powerful incentives to continue relying on fossil fuels, especially for electricity. In the IT sector, for example, the trend toward shifting infrastructure from on-site servers to the cloud has produced such intense price competition among cloud-based hosting companies that many data centers are locating where electricity is cheapest—including the southeastern United States, where coal is the leading source of power. Trends like these can offset much of the carbon-cutting progress that corporations are making in other areas.

To be sure, companies use energy in so many different ways that very few have been able to even measure their carbon footprint. A recent survey of corporations by Treasury & Risk, a finance publication, reveals that only 31 percent have done so. “All of this is about companies really understanding the biggest impacts of what they do,” says Joel Makower, the chairman of GreenBiz Group. Yet most companies have so far measured just a part of their energy usage, he adds. “For some it’s IT operations; for others it can be business travel; for some it’s about how consumers use their products.”

The difficulty of capturing the big picture is turning out to be a business opportunity in itself. That’s SAP’s thinking, at least. The company is now moving into the market for selling software that helps other organizations measure their total carbon impact and take targeted action, starting with the easiest and cheapest opportunities to reduce emissions. Likewise, IBM aims to sell products that reduce energy consumption in data centers.

All this isn’t to say that using more renewable energy always makes good business sense. Often it is expensive, and sometimes prohibitively so. But clearly, many companies aren’t waiting for governments and regulations to guide them. They know that rising prices for carbon-based energy sources are putting them at financial risk, and that strategically pursuing alternatives will give them a leg up on competitors who prefer to watch and wait.