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Posted 30th May 2023

Why Every Company Must Have an Energy Budget

Companies spend millions of dollars on energy every year. Studies show that energy costs are a business's top three operating expenses. As with all significant expenses, developing a budget is considered a best practice. However, energy is more than a cost to be managed; it's an opportunity to use energy strategy to drive value.

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Why Every Company Must Have an Energy Budget

By Suzanne Ogle

Companies spend millions of dollars on energy every year.  Studies show that energy costs are a business’s top three operating expenses.  As with all significant expenses, developing a budget is considered a best practice.  However, energy is more than a cost to be managed; it’s an opportunity to use energy strategy to drive value.  An energy roadmap that integrates energy into your company strategy is a starting point.  Only then can you create an adequate budget that balances resilience, risk, growth, and value and uses energy as a competitive advantage.

Before creating an energy budget, a company must develop an energy strategy that looks at the big picture and megatrends.  Variables impacting your energy strategy include supply-side dynamics, current regulatory and market conditions, and future trends that could impact energy delivery and pricing.  From there, you can translate those factors into an energy budget.   Once developed, an energy budget will also inform decisions to keep your company supplied with affordable and reliable energy.  It can also be used to align strategies for success on ESG initiatives allowing you to maximize company priorities.

National companies to small business owners rely on energy supplies at globally competitive prices.  As the energy market evolves, a business must adopt a holistic approach to energy using cost structure as a point of differentiation.  Energy policy/energy cost, efficiency, and energy management are three pillars that will help business reduce their energy footprint and get more energy for their buck.

When considering an energy budget, the first step is determining your baseline.  This can be a daunting task for companies with geographic breadth.  A process and system that gathers real-time information will allow data to be assimilated and assess energy locally and at an enterprise level.  In addition, data will enable a comprehensive review and an analysis of trends that help understand operations, predict cost and energy impact.

Federal Energy Regulatory Commission (FERC) regulates the energy procurement process in the United States.  FERC is responsible for ensuring that energy markets are operating fairly and efficiently.  That said, energy regulations, as does the energy cost, vary from region to region.  Therefore, where you locate your business has significant implications on your energy budget.  For instance, Kentucky’s low price of electricity, coming in at $12.21 per Kilowatt hour (kWh) for commercial as of December 2022, is 17 percent lower than the national average.  This directly influences bottom-line costs and the capital committed to utility consumption.  For example, in December of 2022, two prominent players in the EV market selected Kentucky as their home for new facilities because of the low energy cost. On the other hand, California has one of the highest energy costs at $19.74 per kWh for commercial as of December 2022, causing businesses to flee the state because of the energy cost and the regulatory climate.

Energy efficiency is using less energy to perform the same task or produce the same result. In the process, it cuts energy bills and reduces pollution.  Simply put, it is the easiest, most cost-effective way to combat climate change.  Government is seeding efficiency programs.  From the federal government’s IRA bill to state efficiency programs, partially funded by electric and gas utilities, there is an opportunity for business to take advantage of incentives.  As a business, the most effective type of energy conservation measure aligns with a business’s budget and gets done.  Benchmark facility energy consumption and identify energy savings opportunities.  Beware of building codes that mandate electrification as a means to efficiency that will require high upfront retrofit costs and increased ongoing electricity costs.

Finally, energy management is a consideration for your energy budget.  Finding the best energy contract for your business needs will offer better value for your energy spending and higher profitability.

Categories: Finance, News


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