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Four strategies to make your energy supply more resilient to price spikes

Published 7 October 2021 in Strategy • 6 min read

With the prices of natural gas, coal and electricity spiking to record highs, manufacturers should start thinking about how to reduce their energy consumption so they can keep production humming irrespective of external price shocks.

A long, cold winter and hot summer in the Northern Hemisphere and resurgent demand in the aftermath of the coronavirus crisis have depleted global supplies of natural gas and sent prices spiralling. Throw in slower wind speeds, which reduced the output of wind farms, and electricity prices in Europe have rallied to their highest on record.

The surge in the price of gas has buoyed demand for other energy sources. Coal prices have rocketed to record highs, provoking a power crunch that has forced some factories in China to shut down. On 5 October, the oil price also hit a three-year-high after OPEC said it would stick to its planned output rises rather than pumping more crude to boost supply.

While the price of energy has always yo-yoed, there are reasons to suggest that the forces behind the recent surge will remain in place for the foreseeable future.

Climate change is making extreme weather more common. The worst drought in 92 years is squeezing Brazil’s electricity supply, which is heavily dependent on hydropower, and in late August Hurricane Ida disrupted oil production in the Gulf of Mexico.

In response to steep increases in production costs, some manufacturers are already re-considering production plans this winter. In September, CF Industries shut down two fertilizer plants in Britain, a move that had heavy repercussions for the UK’s supply of purified carbon dioxide. A coal supply crisis in India could also lead to power outages and shutter energy-intensive industries.

Unlike other supply chain logjams which have prompted companies to consider relocating the manufacture of key parts closer to home, there are fewer options when it comes to energy production. Some firms, such as Britain’s Aggreko rent out generators and cooling equipment for large-scale events and industrial sites. But producing your own electricity tends to be more expensive than sourcing it from the grid.

Here are four strategies to consider for companies that are thinking about making their energy supply more resilient to future shocks.

Invest to reduce energy consumption

With most of the low-hanging energy-saving solutions already implemented, a steep rise in electricity prices may signal it is time for companies to dust off some of the more expensive strategies they have on the shelf.

One area that is ripe for investment are buildings, which are responsible for 40% of the world’s energy consumption. Norwegian proptech company Airtight, whose customers include ISS Facility Services and Intertek, has developed smart sensors that can be integrated into existing ventilation systems to try and control air pressure and reduce energy waste.

Another example is startup Relayr, now owned by insurer Munich Re, which worked with Cisco, a maker of networking gear, to use sensors to understand how to reduce energy consumption in the City of Paris’ institutional buildings. They installed sensors in the city’s buildings and identified simple solutions such as when it made sense to turn the lights on or off.

Optimize production processes

For manufacturers operating in energy-intensive industries, it may be tempting to temporarily power down production to weather the higher prices, especially for those who have limited scope to pass on increased costs to consumers. Faced with a power crunch, factories in some of China’s busiest manufacturing provinces have suspended production, stoking fears about further disruption to global supply chains.

To shield your manufacturing processes from volatile prices, investments that use waste heat generated in the production process to power other activities may now become economically justifiable. In the cement industry, where electric power expenses can account for up to a quarter of total operating costs on average, Waste Heat Recovery (WHR), which uses residual heat in the exhaust gases generated in the cement manufacturing process to heat other parts of the plant or neighbouring buildings, is one way to reduce costs.

Other companies might consider reorganizing production processes so that activities that require huge amounts of heat or electricity are carried out consecutively to save costs in powering equipment up and down.

Relocate energy-intensive activities to lower-cost countries with abundant supply

The massive rise of computing and digital products means that data centers now account for around 1% of global energy use. But cloud computing providers, such as Amazon Web Services, Microsoft Azure and Google Cloud, have sought to improve efficiency by locating data centers in cold environments where there is access to abundant power. Google converted a former paper mill in Finland into a data center which uses sea water from the Bay of Finland to cool its computer servers, while Facebook relies on the Arctic wind in Sweden to prevent its servers from overheating. Meanwhile, Microsoft trialled an underwater data center off Scotland’s Orkney Islands.

The cryptocurrency Bitcoin, which devours energy, has located much of its mining activity in Scandinavia where there is plentiful access to cheap geothermal and hydroelectric power.

Selectively invest in energy generation

For some companies that have cost effective access to a source of energy that no-one is using, it may make sense to invest in generating your own energy, although I do not expect many companies to go down this route.

 although this is unlikely to be transformative.

Inditex, the Spanish owner of fashion brand Zara, wants to install three offshore windmills off the coast of A Coruna to help supply the port and its headquarters in Arteixo where there are offices, factories and a distribution centre.

Elsewhere, Danish fashion company Bestseller, owner of the Jack & Jones, Vero Moda and Selected brands, connected Northern Europe’s largest solar power plant to the grid in October. The plant, financed by Bestseller parent company Heartland, will cover its entire electricity consumption with renewable energy.

As the volatility in energy prices doesn’t look likely to end anytime soon, the above mentioned strategies will help to make companies more resilient to the current and future swings.

Authors

Carlos Cordon

Professor of Strategy and Supply Chain Management

Carlos Cordon is a Professor of Strategy and Supply Chain Management. Professor Cordon’s areas of interest are digital value chains, supply and demand chain management, digital lean and process management.

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