As manufacturing transitions to a high-tech, low-labour environment, managing energy costs will be fundamental for achieving strong financial returns.

Energy has traditionally been one of the smaller components of the total cost in manufacturing, particularly when compared to the cost of labour, raw materials or distribution of product. While not the case in all sectors of manufacturing, it is true that some can be particularly energy intensive.

In the face of increasing competitiveness from low cost centres, exchange rate volatility and declining overall economic performance, no area of a manufacturing business is beyond performance scrutiny.

Furthermore, heightened environmental awareness means an innovative approach to energy and utilities not only makes commercial sense, it also resonates with corporate sustainability agendas.

The dynamics of the cost make up for many manufacturers are changing. As manufacturers gravitate toward higher levels of automation, digital manufacturing and robotics, the cost proportion of labour will continue to decrease and that of energy will increase. This relative cost shift presents increasing opportunity to review energy demand and intensity in all parts of the manufacturing process.

Simultaneously, the energy landscape is changing rapidly, driven by changing human behaviour, increased environmental awareness and energy policy settings.

Australian businesses have experienced an almost 80 per cent increase in energy prices since 2009[1]. They are rightly asking where this is going and what they can do to rein in rampant escalating costs.

The first step toward answering these questions is to understand the macro issues that are occurring in the energy industry, followed by how these issues superimpose on the specific business and energy profile of the manufacturer.

Continuing with Australia as an example, there has been a shift in the energy landscape in recent years through the impact of increasingly competitive decentralised generation forms like solar energy. Load growth at a network level is currently flat or declining in some locations. There is also very limited growth forecast in generation demand.

Despite this stagnation in growth, prices continue to increase. The move by electricity distribution companies to recover margins in an environment where volumes are static or falling is likely to drive further increases. Additionally, the predictions are that gas pricing will continue to increase to compete with international demand pricing.

Meanwhile, there is a new player in the market – decentralised generation, especially rooftop solar.

One industry expert recently referred to rooftop solar as a “new electricity market entrant” with growth figures reported to be in the tens of megawatts of new generation being installed per month. This underscores changes in the energy landscape, where users at all scales, including the manufacturing sector, are looking at decentralised generation to respond to widespread cost efficiency programmes.

Upward pressure on pricing is being relieved by decreasing technology costs for decentralised generation, particularly solar. In the right places, solar now competes with – and beats – many traditional forms of electricity procurement on a long run marginal cost basis, even without subsidies. Many manufacturers are looking at ways to offset energy costs by producing their own, or capitalising a valuable waste stream into energy.

Solar is now a fierce competitor to traditional energy sources

The energy sector is complicated. Changing policies at a governmental level, deregulation, moving goal posts with respect to carbon pricing and new technologies all conspire to blur the solution. Manufacturers are typically able to deal well with issues that are within their control, but where there are such a myriad of macro issues at hand, working out an optimum best value solution can be difficult.

Non-energy sector clients risk approaching generation uninformed with unrealistic expectations, making a decision to purchase an OEM line unsuited to their needs.

A productive navigation path to effectively manage energy costs for any manufacturer, regardless of industry, would involve joining all the dots: looking at the process in detail, identifying when and where energy is used in a smart energy sense, finding alternate energy storage solutions, looking at possible energy reductions through more efficient control or equipment, and identifying the full spectrum of available energy generation solutions.

The transition to a high-tech future will depend upon the willingness of manufacturers to adapt their commercial strategies to the new environment. Successfully navigating the energy equation will be essential in any adaptation strategy.

[1] The Australian, 19 February 2014